Rethinking a CIT Gamble… Preferred & Senior Vs. Common (CIT, CIT-PA, CIT-PC, CIT-PZ)

CIT Group, Inc. (NYSE: CIT) is trading no different than a warrant or way out of the money call option at this point.  In short, any trading other than a forced sale here is nothing more than a Las Vegas bet.  We have seen  275 million shares of common stock trade as of NOON EST and shares are down 70% right around the $0.50 mark.  Traders are still buying CIT common stock in hopes that some rescue package from outsiders will come by the close of business tomorrow.  Some may still be hoping for an eleventh hour decision by Uncle Sam to give a helping hand even after reports that the government is now not interested in helping.  But even traders with the least amount of concern about the entire risk of capital have to know in the back of their mind that if a Chapter 11 filing comes, then those common shares will be worthless.  This brings up an interesting notion.  If you are going to place a bet, and that is all we consider trading in CIT at this point, then why not consider looking at the preferred shares or even the senior notes?  CIT has 3 easy to find publicly traded alternatives to the common shares:

CIT GROUP INC PREFERRED SERIES A (CIT-PA) is the 6.350% NON-CUMULATIVE PREFERRED STOCK, SERIES A has a Par value of $25.00.  This was $350 million issued, or 14 million shares.  PROSPECTUS

CIT GROUP PREFERRED SERIES C (CIT-PC) are down 80% at $2.41 and have traded 1.2 million shares.  This is the 8.75% non-cumulative perpetual preferred shares that have a Par value of $50.00 and were a $575 million issue. PROSPECTUS

CIT GROUP INC EQUITY UNITS (CIT-PZ) are UP 48% at $9.00 on 2.5 million ‘units.’   This was a $1.38 billion issue and are Equity Units with a $25 Par value and and came originally with a 1/40, or 2.5%, undivided beneficial ownership interest in a $1,000 principal amount senior note due November 15, 2015 issued by CIT.  PROSPECTUS

In the capital structure, the preferred shares are above the common, but the senior notes are above the preferred because they are higher-ranked creditors.

Then there is always the other corporate debt that is outstanding.  We have seen prices of those trade in the 60’s, but we are now told that those trade down in the 50’s as of late morning….

As a reminder, buying higher up in the capital structure does not assure by any means that there is residual value.  It depends upon the bankruptcy process and who is in charge of it.  But in just about very single bankruptcy case out there, the common shareholders get to have a funeral.

JON C. OGG
JULY 16, 2009