CIT Bails On $2.3B In TARP Funds, Files Prepack Ch. 11

By Nick Malinowski

Law360, New York (November 02, 2009) -- CIT Group Inc. has slid into Chapter 11 bankruptcy, an action that will likely cost U.S. taxpayers $2.3 billion and raises questions about the lender’s ability to continue to service a broad swath of the small business and middle-market sectors.

In a voluntary petition filed in the U.S. Bankruptcy Court for the Southern District of New York late Sunday night, CIT listed assets of $71 billion and liabilities of $65 billion, and announced debt securities held by more than 500 creditors.

Among the largest unsecured claims are over $7 billion from both Bank of America Corp. and Bank of New York Mellon Corp.

Citibank NA, Goldman Sachs Group Inc. and ABN Amro Bank were some of the other large creditors.

CIT announced that nearly 90 percent of eligible debt holders who participated in preliminary approval of the prepackaged Chapter 11 plan supported the deal, which aims to revamp the bank’s capital structure, improve liquidity, enhance capital levels and accelerate its return to profitability, according to a 650-page disclosure statement.

The company expects to reduce its total debt by $10 billion, and buoyed its credit facility by $4.5 billion in a separate deal on Wednesday, which when combined with operating cash and an additional incremental $1 billion credit line, will provide liquidity during the reorganization, CIT said in a statement.

“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,” chairman and CEO Jeffrey Peek said.

None of CIT’s operating subsidiaries, including CIT Bank, are part of the filing, and they are expected to continue normal operations throughout, the company said. In addition CIT has already asked the court for relief to continue to pay wages, salaries and employee benefits.

CIT’s failure is the largest bankruptcy by a financial lender and ranks as the fifth-largest bankruptcy in U.S. history.

The prepackaged deal proposes to eliminate the current holders of its common and preferred stock, and the U.S. Treasury has already acknowledged that the $2.3 billion in Troubled Asset Relief Program funds it sunk into CIT in December 2008 will not likely be recovered. The Treasury denied CIT’s request for another handout this summer.

The reorganization plan allows bondholders to exchange their debt for new, later-maturing debt, as well as equity in the reorganized company, according to the plan.

As a leading lender to midsize companies in transportation, manufacturing, retail, health care, communications, entertainment and service industries, CIT’s collapse will make many business owners in these sectors nervous, especially those with weaker balance sheets, Michael Gesas, a partner in Arnstein & Lehr LLP’s bankruptcy, creditors’ rights and restructuring practice, said Monday.

“They see that part of the turnaround process would be to eliminate the poor performing portfolios and these parties don’t have any other place to go,” Gesas said.

Unlike Lehman Brothers Holdings Inc., CIT does not have any true competitors that would be able to swoop in and pick up the customers that the company will cast off, or will not renew, as it restructures, he said.

If the upcoming holiday season is down commercially as many analysts expect, there could be a “domino effect” in liquidations among formerly CIT-reliant retailers who are unable to find a new creditor to extend them loans, Gesas said.

On Oct. 1, CIT announced a debt exchange plan aimed at trimming $5.7 billion from its balance sheet, but that fell through, triggering the Chapter 11 contingency plan. The lender also flirted with bankruptcy in August.

While Gesas said he would not rule out CIT’s projected Dec. 31 emergence, he said he would like to see a shored up business model that outlines how the company will remain sustainable in the future.

“Is this a Band-Aid or open heart surgery?” he asked.

The company did not respond to requests for comment Monday.

CIT is represented by Skadden Arps Slate Meagher & Flom LLP.

The case is In re: CIT Group Inc. et al., case number 09-16565, in the U.S. Bankruptcy Court for the Southern District of New York.

--Additional reporting by Jacqueline Bell