CIT Files for Bankruptcy

[StartingOver08]

Nov 1, 2009

Three months ago, the CIT Group barely averted what it considered to be a ruinous bankruptcy filing that would likely have put the 101-year-old lender out of business.

On Sunday afternoon, the company filed for Chapter 11 — but under a so-called prepackaged bankruptcy plan that will enable it to emerge from court protection by the end of the year, under the control of its debtholders. (Read the filing after the jump.)

The filing, made in a Manhattan federal court, will still mean much pain for many parties, beginning with taxpayers. CIT received $2.3 billion in government aid last year, a bailout that came in the form of preferred stock. That will almost certainly be wiped out in the bankruptcy process, the first realized loss in the government’s rescue of the financial system.

While several firms that have received bailout money, including Goldman Sachs and Morgan Stanley, have repaid the government, others — including the American International Group, General Motors and Chrysler — are expected to lead to losses.

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 the thousands of small and mid-sized businesses that borrow from CIT.

CIT was the nation’s largest provide of what is known as factoring, a type of lending used heavily by retailers. The company has spent months trying to reassure its clients that it will remain open for business as stores ramp up for the holiday season. Its travails may be seized upon by its rivals in the sector, including General Electric’s GE Capital unit.

Sunday’s filing caps months of efforts by CIT to stay alive. After being denied another bailout by the federal government, the company bargained with its creditors over a restructuring plan that would keep it operating and cut $10 billion in unsecured debt.

“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 outgoing chairman and chief executive, said in a statement. “This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence.”

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 is among the largest corporate bankruptcies on record, though it is dwarfed by the likes of Lehman Brothers and Washington Mutual. The company said in its bankruptcy petition that it had $800 million in bonds maturing from Sunday through Tuesday.

CIT said that only its holding company will file for bankruptcy, and that most of its important operating subsidiaries, including its Utah bank, will continue to operate normally.

Mr. Peek, the architect of its push to grow beyond its sleepy industrial-lending roots into a major new financial player, will step down by the end of the year. People briefed on the matter said the search for his replacement is ongoing and ultimately remains up to the company’s new board of directors.

Bondholders will receive about 70 cents on the dollar through the prepackaged bankruptcy, though the company warned that investors could receive as little as 6 cents on the dollar in the alternative, a free-fall bankruptcy that lacked a pre-approved reorganization plan.

Last month, CIT unveiled its debt exchange offer, which would have let bondholders tender their holdings for new, longer-dated bonds and preferred stock. But it also began soliciting votes for the prepackaged bankruptcy option. Under federal bankruptcy law, approval of such a plan requires the support of more than 51 percent of the number of creditors voting and more than two-thirds of the dollar value of those bonds.

CIT said in a statement that about 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 secured several important agreements to aid its prepackaged bankruptcy plan. It obtained a $4.5 billion loan from several investors, including bondholders who lent it $3 billion earlier this summer. It also reached an accord with Goldman Sachs that would preserve a $2.13 billion loan even through bankruptcy protection, while paying only a portion of a $1 billion termination fee.

CIT also ended a fight with Mr. Icahn, who had offered to pay bondholders 60 cents on the dollar if they rejected the company’s prepackaged bankruptcy offering. Mr. Icahn instead offered a $1 billion loan, although people close to CIT said the company does not expect to use the financing.

The company will be represented in bankruptcy by the investment bank Evercore Partners, the law firm Skadden, Arps, Slate, Meagher & Flom and the turnaround consulting firm FTI Consulting.

– Michael J. de la Merced

CIT Bankruptcy Petition

http://dealbook.blogs.nytimes.com/20...pagemode=print

[andy158]

Wonder how much in bonuses were paid out by THIS bank before the announcement? Don't worrry our government will bail them out again with our tax money if the chapter 11 fails. It pays to have a strong lobby in congress.

[DeadManCrawling]

This is a very important news story. Aside from the obvious implications like taxpayer money and so on, it is a harbinger of more to come, I think.

Tip of the iceberg, indeed.

Other major lenders are on their heels to a degree that is, so far, being hidden behind accounting practices and government secrecy. The gov't has a list of about 600 lenders it regards as being appropriate for BK. They are propping them up in the short term, but do not release dollar figures, or info on the size of the institutions.

Advanta will topple soon, too, I think. By first quarter, at the latest, I imagine.

The other biggies remain mired in trouble as well, Citi, BoA, all the majors are on the verge of collapse, while the average person thinks a recovery is underway or has already occurred. Interesting times ahead.

[BobMango]

Speaking of tip of the iceberg, I just saw the other day that Fannie Mae's seriously delinquent rate ramped up to 4.45% From 1.57% in the prior year. That's a 300% plus increase. If folks think the housing crisis is over they are sadly mistaken.

When you take into account that we are printing up about $80 billion a month to keep them afloat you may be concerned about how our kids and grandkids are gonna pay for all this.

[banca rotta]

Originally Posted by DeadManCrawling

This is a very important news story. Aside from the obvious implications like taxpayer money and so on, it is a harbinger of more to come, I think.

Tip of the iceberg, indeed.

Other major lenders are on their heels to a degree that is, so far, being hidden behind accounting practices and government secrecy. The gov't has a list of about 600 lenders it regards as being appropriate for BK. They are propping them up in the short term, but do not release dollar figures, or info on the size of the institutions.

Advanta will topple soon, too, I think. By first quarter, at the latest, I imagine.

The other biggies remain mired in trouble as well, Citi, BoA, all the majors are on the verge of collapse, while the average person thinks a recovery is underway or has already occurred. Interesting times ahead.

I agree with most of what you say except the average person like most of us here know the truth that the recovery is window dressing.

The only ones that think we are in recovery are some CNBC reporters as well as others in the media and a small handful of Obama supporters. The least educated of his supporters believes it all. Only when he stops the stimulus and welfare to the wealthy will we be in recovery but that isn't happening anytime soon so enjoy the ride and brush up on your Chinese.

[banca rotta]

Originally Posted by BobMango

Speaking of tip of the iceberg, I just saw the other day that Fannie Mae's seriously delinquent rate ramped up to 4.45% From 1.57% in the prior year. That's a 300% plus increase. If folks think the housing crisis is over they are sadly mistaken.

When you take into account that we are printing up about $80 billion a month to keep them afloat you may be concerned about how our kids and grandkids are gonna pay for all this.

That's an easy one. Our kids will earn $80 billion a year and the national debt will be paid for very quickly.

It worked well in Germany 80 years ago. I just hope our kids grow their own crops otherwise they won't have anything to eat.

[shabam]

With these lenders collapsing, good luck trying to obtain credit in the near future. If people with no bankruptcy on their file and sound credit reports cannot obtain credit, we will have no chance.

[DeadManCrawling]

Originally Posted by shabam

With these lenders collapsing, good luck trying to obtain credit in the near future. If people with no bankruptcy on their file and sound credit reports cannot obtain credit, we will have no chance.

We, on the forum, must count ourselves fortunate in this case. We, at least, are learning to live with NO credit, and do for ourselves what has, in the past, been expected of banks, society, and government.

Self-sustaining is a good word to keep handy, and many of us on the forum are making moves to be self-sustaining, at least as much as possible.

It will be trial by fire, anyway, but I personally, am preparing for the flames.

[justbroke]

Bring on the Ameros!

(If only I had stockpiled some when they were announced. )

[Lajazz947]

Originally Posted by DeadManCrawling

We, on the forum, must count ourselves fortunate in this case. We, at least, are learning to live with NO credit, and do for ourselves what has, in the past, been expected of banks, society, and government.

Self-sustaining is a good word to keep handy, and many of us on the forum are making moves to be self-sustaining, at least as much as possible.

It will be trial by fire, anyway, but I personally, am preparing for the flames.

Good comments.

We have completely adjusted to all cash and it feesl great to have no consumer debt.

I am patiently waiting to get my modification and tax debt straightened out before I buy a used car with A/C and in the meantime I have fixed up ( all cash ) my 98 Jeep Wrangler and maintain my wife's '03 Acura.

The Jeep Rides rough and the Acura is getting along in miles but we own them outright and we sure do not miss the $1400+ payments we had on our other cars.

[nc73]

It is possible to live without credit. I hope they all go bankrupt. It will force everyone to live within their means.