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Assuming your average holding period is 10 years and 6% vs 9% yield, you are talking about an extra 30 cents of dividends for the 10 year period per dollar of investment.
If I discount the extra cashflows using a 3% rate, we are talking about an extra 25 cents per dollar in present value terms. That's quite a bit of money.
Assuming this spread difference is due to credit risk, then it may be possible to look at it from the point of view of "What would the market charge me for a CDS if I were able to buy protection against default". i.e. If I buy $1 of CIT and enter into a insurance contract to protect myself against CIT default for a nominal of $1, the net effect should be riskless (wrt Credit Risk though not stock price risk). If I have time, I will try to calculate it tonight or tomorrow.
I am a long time holder of CIT.
Yes, I remember why. Right at the beginning of the financial crisis, CIT negotiated a new loan at a pretty high effective interest. At that time, some people criticized it for negotiating such a high interest rate. In hindsight, that was a pretty good and fleet footed reaction to the situation.
If I discount the extra cashflows using a 3% rate, we are talking about an extra 25 cents per dollar in present value terms. That's quite a bit of money.
Assuming this spread difference is due to credit risk, then it may be possible to look at it from the point of view of "What would the market charge me for a CDS if I were able to buy protection against default". i.e. If I buy $1 of CIT and enter into a insurance contract to protect myself against CIT default for a nominal of $1, the net effect should be riskless (wrt Credit Risk though not stock price risk). If I have time, I will try to calculate it tonight or tomorrow.
(12-05-2011, 09:10 AM)yeokiwi Wrote: CIT surprisingly did not perform a private placement nor right issues during the darkest of the hour in 1st qtr 2009.
I am a long time holder of CIT.
Yes, I remember why. Right at the beginning of the financial crisis, CIT negotiated a new loan at a pretty high effective interest. At that time, some people criticized it for negotiating such a high interest rate. In hindsight, that was a pretty good and fleet footed reaction to the situation.