Creditors Back CIT’s Bankruptcy
As the CIT Group sought desperately to avoid bankruptcy this summer, it argued that being forced into Chapter 11 protection would spell disaster for its customers: a wide swath of the nation’s small and midsize businesses who rely on the 101-year-old company for financing.
On Sunday, CIT entered what it called a different kind of bankruptcy, one that will let it reemerge from court protection by the end of the year under the ownership of its creditors, who widely supported the reorganization plan.
The filing marks the culmination of months of bargaining among CIT, its creditors and the federal government over the company’s fate. Bank regulators concluded over the summer that even though CIT was vital to many small businesses that needed financing, the company’s problems did not pose the type of systemic risk that led to the aggressive rescues of Citigroup and Bank of America.
Even so, the bankruptcy filing means taxpayers will lose the $2.3 billion investment they made in CIT as part of the government’s sweeping financial rescue last fall, marking the first such loss of the bailout program.
Even though the government has been repaid with interest for its investments in companies like Goldman Sachs and Morgan Stanley, it will probably see more losses in companies like the American International Group and Chrysler.
By filing a so-called prepackaged bankruptcy plan, CIT is aiming to limit the damage inflicted on the scores of retailers and other companies that depend on the specialized financing it provides. It is the dominant provider of factoring, in which a company sells the debt it is owed to a company like CIT at a discount.
Many companies that provide factoring have been hit hard by the faltering economy and have closed their doors, leaving more businesses dependent on the likes of CIT, according to Michael C. Appel, the head of the retail and consumer practice at Quest Turnaround Advisors, a consulting firm.
“In the long run it will be good for CIT,” said Emanuel Weintraub, chief executive of Emanuel Weintraub and Associates, a management consultancy. “In the short term it will not be good for thinly financed companies that may not be immediately taken in by other lenders.”
When CIT disclosed its troubles in July, many retailers were preparing their orders for the holiday season and were terrified by the prospects of a sudden and uncontrolled Chapter 11 filing, said Ellen Davis, vice president of the National Retail Federation.
CIT’s filing will test whether a financial company can survive the Chapter 11 process. Bankruptcy has long been considered a death knell for lenders, whose very existence depends on the confidence of its creditors and customers. The company’s struggles have been watched with interest and trepidation by analysts and its clients.
“The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy,” Jeffrey M. Peek, CIT’s chairman and chief executive, said in a written statement.
It also means the end of CIT’s efforts to transcend its roots as a sleepy financier of retailers, restaurants and manufacturers. Under Mr. Peek, a former high-ranking Merrill Lynch executive, the company branched out into student lending and investment advisory services. Befitting its ambitions, it moved from an office park in Livingston, N.J., to a flashy tower in Midtown Manhattan.
But the company was laid low by the turmoil in the credit markets, which sapped its ability to finance its daily operations. Even after receiving the initial $2.3 billion in government aid, it went to its regulators for additional help, only to be told it needed to find a solution in the private markets. It subsequently bargained with its creditors over a restructuring plan that would keep it operating and cut $10 billion in unsecured debt.
While CIT had hoped to stay out of bankruptcy court through a bond exchange offer, that plan failed to win enough support from bondholders, the company said in a statement.
With $71 billion in assets and nearly $65 billion in liabilities, CIT’s bankruptcy ranks among the largest in corporate history, though it is dwarfed by the bankruptcies of Lehman Brothers and Washington Mutual. CIT said in its bankruptcy petition that $800 million of its bonds would mature from Sunday through Tuesday.
CIT said that only its holding company was filing for bankruptcy, and that most of its important operating subsidiaries, including its Utah bank, would continue to operate normally. As part of an effort to revamp its business model, the company plans to move more of its operations into its bank instead of relying on the more volatile capital markets.
Bondholders will receive about 70 cents for each dollar owed them through the prepackaged bankruptcy. CIT said investors would have received as little as 6 cents on the dollar in the alternative, a free-fall bankruptcy that lacked a pre-approved reorganization plan.
CIT said in a statement that holders of about 85 percent of its $30 billion in bond debt participated in the voting. Those investors voted almost unanimously to support the prepackaged bankruptcy plan.
Last week, the company got a $4.5 billion loan from several investors. It also reached an accord with Goldman Sachs that would preserve a $2.13 billion loan.
Sources: NY Times
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