I had previously stated that CIT was going to do everything in their power to keep Carl Icahn out of their restructuring plan.  Based on their public “calling out” of his statements it appeared things were going to get out of control.  Today; however, the story took a very strange twist.

CIT has received a $1B loan from Icahn – AND – he has agreed to support the CIT restructuring plan.

This is a very odd twist.  Actually, it is one that makes someone ask “What is in it for Carl?”  As he stated there is more money to be made with his plan I suspect he CIT has provided him with an offer he could not refuse.  How he Icahn makes out in this situation will be made clear in coming days, I’m sure.

Also, in the coming days, I’m still expecting the bankruptcy.

This is exactly what I was talking about – when Carl Icahn gets involved with a company, it always seems to turn into a freak show. Today CIT responded to Icahn and his attempt to interject himself into the mix as a means of picking up assets on the cheap:

Mr. Icahn is seeking to convince smaller bondholders to vote against the Company’s proposed restructuring plan now in exchange for his ill-defined promise that some of Mr. Icahn’s unidentified “affiliated entities” will eventually deliver on that vague promise.

…

Mr. Icahn has also misrepresented the fundamental economics of the Company’s restructuring plan. As described in CIT’s plan of reorganization, senior unsecured bondholders would receive consideration of $700 in new secured bonds for every $1,000 of existing bonds, in addition to equity consideration which would allow for participation in future value created by the Company. In addition, under the Company’s plan, bondholders would receive substantially all of the equity of CIT.

…

Second, with regard to restrictions on the use of cash, contrary to Mr. Icahn’s assertions, CIT has incorporated into its plan a cash control process that places restrictions on the reinvestment of cash into the business and ensures that certain cash flows are used to accelerate the repayment of debt.

My guess – CIT will do everything in their power to see that Icahn does not get his way.

Got to give it to the man, he can be rather creative.  In an attempt to prevent a pre-packaged bankruptcy, Carl Icahn is providing a 30 day, 60% value, offer to small bondholders if they support him and his efforts.

Billionaire investor Carl Icahn in a statement Tuesday morning said he is giving downside protection to smaller CIT Group Inc. noteholders, in the form of a 30-day tender offer at 60% of par value, if they back his opposition to the company’s prepackaged bankruptcy plan.

Icahn is only looking out for Icahn (and the buck he can make), he is not looking out for the common shareholder. I still believe, based on his open letter to the board, his intent is to obtain control and sell off the assets of CIT.

I just ran into this – Icahn issues an open letter to CIT Bondholders.  There are a number of things one needs to see in this letter as Icahn, I believe, shows exactly what his intent is with CIT Group (emphasis added):

TO: CIT GROUP BONDHOLDERS

October 23, 2009

Ladies and Gentlemen:

I have learned over the years that the best investments are based on simple concepts; I call these “no brainers.” I believe that the CIT bonds would qualify as just such an investment with one caveat; we, the bondholders, must not endanger the value of our investment by voting for the Exchange Offer/pre-packaged bankruptcy plan currently proposed by the company. CIT’s balance sheet is comprised of a diversified pool of loans and assets which will generate huge cash inflows over the next few years. If these assets are “run off” in a controlled way, we believe our bonds are worth par and in no event less than 80-85% of par value. However in the company’s plan, the assets will not be wound down; rather, they will be reinvested in an operating business controlled by the company’s current Board of Directors. This is the same Board and senior management team that has presided over the demise of our company by making Titanic-sized errors, some of which we believe were the result of gross negligence.

The company’s stated strategy is to run a “bank-centric” operating business by transferring several of the business platforms into the Utah bank. While we are not against trying to grow the value of these platforms, we are opposed to doing so at the risk of the about $65 billion of asset value mentioned above. The company’s plan would put our assets at peril. There are several major pitfalls in their plan: 1) in order to keep operating the businesses prior to their transfer, the company is going to continue to reinvest as much as $15-20 billion of loan proceeds as they are repaid, rather than returning the money to bondholders (given the company’s track record, chills run through me thinking of the current team investing our money); 2) corporate overhead will be several hundred million dollars per year higher than it needs to be in order to keep these businesses alive; and 3) the company will continue to operate as a bank holding company, which means that no matter how poorly they perform it will be almost impossible to significantly the Board.

The senior management and board have received large perquisites over the years, even as they have bankrupted CIT by making major strategic errors (such as the Goldman Sachs transaction, which is one of the worst financings in corporate history and will require our company to pay an outrageously large prepayment penalty upon default or cancellation). The perquisites, including large bonuses as well as donations to personal causes, were not cut back even when the company kept bleeding our money on the path to bankruptcy. The board and senior management are now asking us to “bail them out” by approving a pre-packaged plan which would 1) give them control of an operating company which is losing $1 billion/year, with all the freedom to continue with their attendant perquisites, 2) give them releases for past mistakes (and I believe there were many), and 3) provide funding, with our money, for ongoing operations, even though they are in the red.

Even more unconscionable is the fact that the company is using our money to purchase votes for its Exchange Offer/Pre-Pak. The company is currently arranging a financing. The economics offered to prospective lenders are well in excess of what the current syndicated loan market should dictate, given the loan’s collateral coverage. However, in order to participate as a lender and purchase this undervalued loan, you must be a large bondholder and vote to accept the company’s Exchange Offer and/or pre-packaged plan. Rather than doing a financing on the best possible terms for the company, the Board has decided to over-pay for this debt to buy votes for their plan. Would you vote for a governor who used state funds to buy votes? Not only wouldn’t you vote for him, you would throw him in jail! We are currently offering an alternative financing that would save the company $150 million and wouldn’t require bondholders to vote either way. Many bondholders have called us to express interest in our financing. One wonders if the company even tried to get cheaper financing, and if they did, how they could possibly have failed to do so. The company should be aware that if they buy votes through this loan, we will fight the debt sale and the fraudulent election through the courts for as long as it takes.

Meanwhile, Houlihan Lokey, purported advisor to the bondholders, recommends the company’s plan. But Houlihan has their own agenda. They have already received millions of dollars in fees from the company and continue to receive hundreds of thousands of dollars per month. If the Pre-Pak is approved they will receive millions of dollars in additional fees within a few months with virtually no risk. However, if the company files for a more traditional bankruptcy, Houlihan’s outrageous fees could be challenged in court, and will likely take longer to collect. Little wonder why Houlihan has come down on the side of the company. Little wonder they have failed to challenge the waste of funds in the $6 billion “vote-buying” financing even though they purportedly represent our interests.

CIT would have you believe that a bankruptcy would be calamitous. We do not believe this to be the case. Even in a traditional bankruptcy the company’s assets would be protected and a run-off of assets would prove extremely profitable for bondholders. Additionally, in my opinion it would not take long to approve a plan that might include releases for the Board, which I believe they will be very interested in receiving. However, I am certainly not against arriving at a pre-packaged plan which might eventually include the transfer of the platforms into an operating bank. But it is complete obfuscation on the part of the company to say that the only way to get the government to approve the reopening of our bank is to keep the current Board in control. To me this is ludicrous. The government has shown no love for senior management or the Board. They have not only refused to bail them out, they have issued a cease and desist order on an otherwise healthy bank. What does this tell you they think of current management and the Board? Ironically, I believe the best way to get government approval to open the bank again is to rid ourselves of the Board and senior management team. Therefore, I have suggested the following compromise:

1) Reconfigure the proposed Board. Rather than allowing the current Board members to retain control, we would propose a 10 person board with current Board members comprising no more than 3 of the directors, the bondholders, or a committee of the bondholders, nominating 6 independent directors and the new CEO holding the final seat. We will agree that all of the nominees will be subject to approval by the regulators so that we can have the hope of reopening the bank. The company is misleading you when they tell you that in their plan we will have the opportunity to replace the Board at an annual meeting to take place in May, because as a bank holding company it is nearly impossible to have a proxy fight to replace the majority of the directors- make no mistake, the current Board wants to entrench themselves or their designees for the foreseeable future;

2) Tighten the cash sweep. We would eliminate the myriad carve-outs and other exceptions to the cash sweep to ensure that the majority of cash coming into the company is used to repay our debt; and

3) Provide for a discreet, nine month timeframe to allow for the transfer of the Vendor and Trade Finance platforms into the bank. If the government does not permit the transfers within that timeframe then the assets would be wound down and overhead reduced, with proceeds paid out to debt holders.

I believe that bondholders should insist that the company put forth the pre-packaged plan as outlined above. It is time that the Board realizes that this company now belongs to the bondholders, not them. We need your support to prove this to certain members of the Board and management. It is important that you contact us and let us know your thoughts. Please reach out to either Vince Intrieri at (212) 702-4328 or Steve Mongillo at (212) 702-4343.

Sincerely

Carl C. Icahn

SOURCE Carl Icahn

Icahn is telling you, if he had control, what he would do: drive the company into bankruptcy, give the high revenue assets to the bond holders, and not fund other aspects of the business.

Notice that he was “we” as in “We bond holders”.  Icahn purchased roughly 6% of the outstanding CIT bond in September as he saw some meat he could pick apart from the bones.  He has no desire to protect CIT (the company), nor does he have any desire to protect stockholders.  This is all about Icahn and what is in it for him.

CIT has a number of questions for Carl Icahn and his 6 Billion dollar loan proposal.

Icahn has offered to underwrite a loan of the same size with only $150 million in fees and no provision that bondholders approve the restructuring plan but details haven’t yet been released. Whether there are other stipulations attached to Icahn’s offer isn’t yet clear. He’s been vocal in his frustration at the CIT board and some of their past financing decisions–suggesting that he’s vying for more control.

“Icahn seems to believe an orderly liquidation is best for the company, but how he plans to do this is unclear,” said Keefe, Bruyette & Woods analyst Sameer Gokhale, adding that until the company gets a better idea of his intentions regarding the board and restructuring strategies, their hands are tied.

Let’s be clear – Icahn is no champion of the “little guy”, he is in it to make money.  The most money for him would be the liquidation of CIT.

While I don’t expect it to take place tomorrow at the earnings release, since they have until 10/29 to complete the exchange; however, I believe CIT Group will end up in Bankruptcy one way or another.

Another group throws their comments in on CIT Group:

“Forget Icahn, forget the exchange,” Egan-Jones said in a note to clients this morning. “Neither Icahn’s offer nor the revised exchange (which reduces maturities by 6 months) provides the best value to creditors.”

On Monday, mr. Icahn proposed an alternative plan in which he would loan CIT the $6 billion it needs to avert bankruptcy. In a note to CIT’s board Monday morning, Mr. Icahn says that his plan would save the company $150 million in fees by not “shamelessly offering certain large unsecured bondholders the opportunity to purchase $6 billion in secured loans in the company at well below fair market value.”

But Egan-Jones believes that CIT’s new exchange offer, as well as Mr. Icahn’s new loan offer, is inadequate and that bondholders should push the company into bankruptcy to recover more value. The firm’s liquidation analysis uses a value of 70 percent on CIT’s loans and creditors realizing 82.5 percent upon liquidation and 68.5 percent on a present value basis. The firm is urging bondholders to reject all deals below 90 percent of the face value of the bonds.

The short of the Egan-Jones comment: liquidation.

On another note, the link above has the fully Icahn letter to the CIT board.