Two things from today on business financing.
First, a look at the big name in credit for small businesses. From Bloomberg, CIT Group Defers Interest Payments on Bonds Due 2067:
CIT Group Inc., the 101-year-old lender that got $3 billion in financing from creditors in July to avoid collapse, is deferring interest payments on subordinated bonds due in 2067.
These were 60 year bonds sold some time in 2007. Back then, financing terms were quite loose, so it was a pretty good move for CIT. Not such a good move for the bond investors, though. Wonder what the losses on those bonds look like:
CIT’s $750 million of 6.1 percent bonds due in 2067 fell 5 cents to 8 cents on the dollar to yield 81.4 percent, as of 8:33 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
92% loss? I wonder if they’ll defer the payment until after April. Remember that their last round of special financing established a senior position. They’re also considering selling units to raise cash. I don’t think there will be anything left for these bondholders in a bankruptcy. I’d probably still consider these bonds overpriced.
Second, bad news for investment grade business debt. Via Zero Hedge, Collapse In Commercial Paper Outstanding Bodes Ill For Corporate Growth. Skipping to the punchline:
The immediate consequence of this is that the core companies that make up the economy, those that are not too leveraged and actually generate more than nominal cash flow, will retrench expenditures, and will make the case for a revenue bounce in the coming quarters and years even more problematic, even as all the overhead fat has been eliminated, resulting in years of flat if not declining earnings.
I think this latter problem has a greater possibility of a sudden turnaround. I don’t think a turnaround is likely, but there’s no logistical barrier.
It is true that the Fed is trying to flood the market with liquidity. It is less evident that it is succeeding in the areas where such liquidity is most needed.
