CIT Files For Bankruptcy; Taxpayers Lose $2.3 Billion
November 14, 2009 · Posted in Business
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 federal court in Manhattan, 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 midsize businesses that borrow from CIT.
CIT was the nation’s largest provider 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. Relatively few other companies serve as factors, and among them are other embattled lenders like GMAC.
The filing on Sunday capped 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 would file for bankruptcy, and that most of its important operating subsidiaries, including its Utah bank, would 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 was continuing and ultimately remained 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 preapproved 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 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 in the 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 the investor Carl 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 did 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.
The most important piece of information to get out of this: This is the first honest and outright example of how TARP taxpayer money is beginning to evaporate.