Distressed Debt Recommendations from Citigroup

This past Tuesday, Citigroup’s distressed analysts presented their respective top picks to a large audience at the company’s high yield conference. As one would expect from a “flow shop” most of the names discussed were very high profile companies with large capital structures. While there were no “hidden gems” unearthed, their team did a great job of elucidating their points. The presentations opened my eyes (wider) to a couple of situations I had previously written off as not worth the trouble. The following is a list of their top picks with a brief synopsis of their thoughts.

AMERICAN GENERAL

• Positive on the entire cap structure (bank debt YTM = 14.5%; bonds 13-14%)
• Not just a sub-prime portfolio – had a different business than most because they knew they were keeping the loans being made
• Thinks they are able to handle the July 2010 bank debt maturity through internal liquidity, bank group extension, or a loan/cash from AIG given the ILFC precedent

CIT GROUP

• Like the steering committee loans because they have ‘B’ yields for ‘BB’ risk
• Thinks the Series B Notes go to par upon emergence
• Estimates $6 bln of book equity, which implies 18 points of additional bond value
• New notes should return 20+% over next 6 months

CHEMTURA

• Bonds trade at 107 area, downside is your claim
• 2016 Notes are structurally senior to other notes
• IF EV > 1.2 bln then you get par on the 2016s
• Upside comes from equity value
• Risk is that you are taken out for cash or reinstated somehow

GM / MOTORS LIQUIDATION

• (Note that GM bonds were marching up to 23 from 17 throughout this day)
• Base case recovery is 29.5
• Q3 #’s show they are ahead of plan
• GM bonds cheaper than Ford equity
• Macro bet on the economy

LEHMAN

• (Citi’s analyst did an amazing job with this presentation. He gave out a 30 page slide deck that I would highly recommend for those with Citi coverage. The bullets below are from the first page alone!)
• Resolution of Lehman’s many estates will be very difficult and there is no way to determine assets and claims with precision
• However, there is enough information to set reliable ranges for many variables
• Estimate base case recoveries of 25-32
• Recovery is most sensitive to changes in asset value assumption, setoff and collection
• Time to distribution and discount rate are next most important drivers