CIT Files Bankruptcy; U.S. Unlikely to Recoup Money

[Zenos]

Wasn't this one of the corporations that were too large to fail? Don't believe the .gov or MSM when they say things are getting better.






Nov. 1 (Bloomberg) -- CIT Group Inc., a 101-year-old commercial lender, filed for bankruptcy to cut $10 billion in debt after the credit crunch dried up its funding and a U.S. bailout and debt exchange offer failed.

CIT listed $71 billion in assets and $64.9 billion in debt in a Chapter 11 filing in U.S. Bankruptcy Court in Manhattan. The U.S. Treasury Department said the government probably won’t recover much, if any, of the $2.3 billion in taxpayer money that went to CIT.

The bankruptcy “will allow CIT to continue to provide funding to our small business and middle-market customers,” said Chief Executive Officer Jeffrey Peek in a statement.

CIT, which filed the fifth-largest bankruptcy by assets, said it plans to exit quickly due to support from bondholders, who voted in favor of a so-called prepackaged plan. None of CIT’s operating subsidiaries, including Utah-based CIT Bank, were included in the filing, and operations will proceed as normal, CIT said in a statement.

CIT has $1 billion from investor Carl Icahn to fund operations while it reorganizes. The credit line, to be drawn on until Dec. 31, will be a so-called debtor-in-possession loan. It also expanded its $3 billion credit facility by another $4.5 billion on Oct. 28.

Debt Holders Say No

The company had asked bondholders to exchange $30 billion in debt for new securities and equity. Icahn made a competing offer. After CIT’s offer expired at midnight on Oct. 29, the company said it was tallying 150,000 ballots.

Debt holders rejected the exchange offer, with 90 percent of holders who voted opting for the company’s prepackaged bankruptcy plan.

The failure of CIT’s bank-holding company is the biggest measured by assets since regulators seized Washington Mutual banking unit in September 2008. Washington Mutual and IndyMac Bancorp Inc. are other banks with unmanageable debt that sought court protection to wind down their holding companies. Both put their retail banking units in the hands of the Federal Deposit Insurance Corp. CIT became a bank-holding company in December to qualify for a Treasury bailout.

“Disruptions in the credit markets coupled with the global economic deterioration that began in 2007, and downgrades in the company’s credit ratings” hindered CIT’s ability to obtain financing, according to an Oct. 2 filing with the Securities and Exchange Commission.

Bank of America

According to the petition, CIT’s largest unsecured claim holders were Bank of America Corp., as collateral agent for a $7.5 billion claim, and Bank of New York Mellon Corp., as a trustee for retail bonds with a claim of $3.2 billion. Canadian senior unsecured notes have a claim for $2.1 billion, and Citigroup Inc. also has a $2.1 billion claim as an administrative agent to bank debt due 2010.

CIT had said in its Oct. 2 outline of a prepackaged plan that it would give most noteholders new notes at 70 cents on the dollar plus new common stock, compared with the range of 70 cents to 90 cents and new preferred stock proposed in the exchange offer.

CIT also said it would try to emerge from bankruptcy two months from the date of its filing.

‘Free-Fall Bankruptcy’

CIT, which reported $3 billion of losses in the past eight quarters, received $2.3 billion from the U.S. Treasury on Dec. 31 when it purchased preferred stock and warrants. The company wasn’t given access to the FDIC’s debt-guarantee program.

“We will be following developments very closely with an eye towards protecting taxpayers during the bankruptcy proceeding,” Treasury spokesman Andrew Williams said today in an e-mailed statement. “But as the company’s disclosure on the prepackaged bankruptcy makes clear, with debt holders receiving less than face value of their instruments, recovery to preferred and common equity holders will be minimal.”

CIT said the debt exchange would have given it a quicker reorganization without the cost of defaulting on loans, unwinding derivatives or fees for bankruptcy lawyers.

Icahn, who said he’s the largest bondholder with $2 billion of debt, had initially sought to block CIT’s prepackaged plan, saying bondholders would get a better deal if the company went into a “free-fall bankruptcy.” He offered to buy bonds for 60 cents on the dollar.

Dunkin’ Brands

The company tried to stave off bankruptcy with a $3 billion rescue loan from bondholders in July to see it through a cash crunch. Bondholders stepped in after CIT failed to get another U.S. government bailout or enough loans to permit an out-of- court restructuring.

CIT’s $3 billion facility, arranged by Barclays Plc, included investors led by Newport Beach, California-based Pacific Investment Management Co. and Centerbridge Partners LP in New York. Also providing financing were Oaktree Capital Management LLC and Capital Research & Management Co., both in Los Angeles, and Boston-based hedge fund Baupost Group LLC and Silver Point Capital LP in Greenwich, Connecticut.

“CIT’s liens against its customers’ assets will make it very difficult for them to procure replacement financing without paying off everything owed to CIT,” said Martin J. Bienenstock, a bankruptcy lawyer with Dewey & LeBoeuf LLP in New York. “This could give new meaning to headache and chaos.”

The lender funds about 1 million businesses such as Dunkin’ Brands Inc. in Canton, Massachusetts, and Eddie Bauer Holdings Inc., the bankrupt clothing chain in Bellevue, Washington.

Smaller Borrowers

CIT has said it’s the third-largest U.S. railcar-leasing firm and the world’s third-biggest aircraft financier. It also finances trade in Canada, Europe and Asia by lending to small manufacturers that sell to retailers.

CIT accounts for about 70 percent of all short-term U.S. financing known as factoring, worth about $40 billion a year, according to Ray Ecke, president of Credit Management Resource in Oakland, New Jersey.

In factoring, suppliers and manufacturers sell payments owed for goods and services to companies such as CIT because they need immediate cash. The process gives vendors money to produce goods retailers have ordered. Retailers typically make payments within 90 days. After they do, a factor keeps a fee based on a percentage of the total order.

Subprime Mortgages

“Short term, it’s going to cause some difficulties for startups and smaller borrowers,” said Jean Everett, a partner at Hiscock & Barclay focusing on financial institutions and lending. “CIT lent across so many sectors it’s sort of difficult to predict how it’ll affect each sector.”

CIT fell 23 cents to 72 cents in New York Stock Exchange composite trading on Oct. 30. The stock is down 84 percent year to date.

Peek, 62, who joined CIT in 2003 after failing to land the top job at Merrill Lynch & Co., pushed the lender into subprime mortgages and student loans to pump up growth.

Assets at CIT jumped 77 percent from 2004 to the end of 2007 as it acquired companies that focused on vendor finance, education lending and medical, construction and industrial equipment loans. Net income surpassed $1 billion in 2006, a 39 percent increase over two years.

CIT’s $500 million of notes due Nov. 3 fell to 68 cents on the dollar as of Oct. 29 from 80 cents at the beginning of the month, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

http://www.bloomberg.com/apps/news?p...yTH2eLwY&pos=1

[Joe_J.]

CIT's move to bankruptcy court means more instability for struggling retailers facing holidays

By Stephen Manning and Anne D'Innocenzio, AP Business Writers

On 12:09 am EST, Monday November 2, 2009

WASHINGTON (AP) -- The bankruptcy of a key lender that helps retailers stock their shelves is adding to the industry's worries ahead of the critical holiday shopping season.

CIT Group Inc. filed for Chapter 11 bankruptcy protection Sunday in New York after months of struggling to avoid collapse. The company provides badly needed credit to thousands of small and mid-sized businesses, and is a critical part of the flow of capital in the retail sector.

CIT stressed that its lending operations will continue to operate as it proceeds through bankruptcy with the hope of shedding $10 billion in debt. Chairman and CEO Jeffrey M. Peek said the company's prepackaged reorganization plan "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."

But retail groups and analysts warn that the case will likely add to the instability in the retail sector. CIT is an important source of capital, working with 2,000 vendors that supply merchandise to more than 300,000 stores. About 60 percent of the apparel industry depends on CIT for financing.

In the last few weeks, the nation's stores have begun filling their floors with holiday merchandise, but they still need a reliable source of lending to prevent shipping disruptions and to restock after the holidays. Even one day that vendors are cut off from much-needed financing could create a bottleneck, resulting in shipments of merchandise left on docks or in vendors' warehouses.

CIT expects to emerge from bankruptcy by the end of the year, but a dragged-out case or any glitches could further disrupt the already tight credit markets for retailers, said Joe Alouf, a partner with Eaglepoint Advisors, a crisis management company that is partly owned by Kurt Salmon Associates.

"CIT is the 600-pound gorilla in the industry," Alouf said.

Craig Sherman, vice president of government affairs at the National Retail Federation, thinks the industry "dodged a bullet on the holiday season" for the most part, because most merchandise is in stores' distribution centers. However, he said CIT's woes could throw a wrench in ordering for the important 2010 spring season. NRF officials say that as stores prepare for a rebound in consumer spending next year, access to credit is very important.

Harold Reichwald, co-chair of law firm Manatt, Phelps & Phillips' banking group, said that CIT's case will likely force the company's customers to look elsewhere for financing.

"If I was a small businessman, I would say to myself, 'I have to find alternatives,'" Reichwald said. "In this marketplace, there isn't a lot of alternatives."

CIT's Chapter 11 filing is one of the biggest in U.S. corporate history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. The bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion. The move wipes out current holders of its common and preferred stock, meaning the U.S. government will likely lose the $2.3 billion in taxpayer funds it sunk into CIT last year to prop up the company.

The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year. Treasury Department spokesman Andrew Williams said Sunday that the government will be closely monitoring the bankruptcy proceedings, but acknowledged that "recovery to preferred and common equityholders will be minimal."

CIT had been trying to fend off disaster for several months and narrowly avoided collapse in July. It had struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis. The company pulled back sharply on lending to businesses as it tried to preserve cash. According to its most recent quarterly earnings report, the company originated just $4.4 billion worth of new business during the first six months of 2009, compared with $11.3 billion in the first half of 2008.

The company received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to persuade bondholders to support a debt-exchange offer, a step that would have trimmed at least $5.7 billion from its debt burden and given CIT more time to pay off what it owes.

Ever since CIT's troubles flared up last summer, the retail industry has carefully monitored the lender, with many vendors scrambling to find alternative financing at rivals like Rosenthal & Rosenthal. But finding a replacement hasn't been easy because competitors can only take on so many more clients. Moreover, while large publicly traded companies with sales of more than $2 billion have found the credit market loosening up in recent months, small and medium-based companies have largely found themselves shut out, Alouf said.

The big question is how long CIT will remain under court protection. A prepackaged bankruptcy, which has the support of major bondholders, speeds up the process of restructuring CIT's debt and could help it exit court protection in a matter of months. A swift exit by the holidays could alleviate some retailers' worries.

http://finance.yahoo.com/news/Retail...&asset=&ccode=