CIT goes bankrupt

[phongn]

CIT Group Inc. filed for bankruptcy Sunday afternoon, said people familiar with the matter, in a high-stakes restructuring intended to keep the doors open at one of the U.S.'s largest small-business lenders.

CIT's board met early Sunday afternoon, these people said, and the company sought Chapter 11 protection in New York a few hours later. The lender expected to have considerable support from creditors for its "prepackaged" reorganization, which could allow CIT to have its plan approved quickly and emerge from bankruptcy by the end of the year, other people familiar with the matter said.

The filing comes after a previous debt-exchange offer made to CIT's bondholders failed. But CIT garnered broad support for a prepackaged bankruptcy, people familiar with the matter said.

The $2.3 billion in taxpayer money spent to save CIT is likely to be wiped out, as the lender prepares for the filing.

In a move smoothing its restructuring, the company said Friday that it had persuaded billionaire investor Carl Icahn to support its prepackaged bankruptcy plan. Mr. Icahn, who wanted to push CIT into liquidation, failed to persuade other bondholders to derail CIT's restructuring plan.

With $71 billion in assets, CIT has the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers Holdings Inc., Washington Mutual Inc., Worldcom Inc. and General Motors Corp. CIT's Utah bank, which has about $10 billion in assets, wouldn't be part of the bankruptcy filing.

One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said.

Starting last year the Treasury invested upward of $400 billion in a variety of companies, from auto makers to insurers, to shore up their finances. A number of those companies, such as Goldman Sachs Group Inc. and Morgan Stanley Inc., have repaid the bailout money. A bankruptcy of CIT would be the first time the government recorded a loss on one of its bailout investments.

Taxpayers could have lost more, though. Despite likely losing its $2.3 billion investment, the U.S. government saved possibly billions more in losses when it rebuffed further bailout requests over the summer, after concluding CIT's demise wouldn't threaten the broad financial system.

The filing could also be a blow to some of the tens of thousands of small- to medium-size businesses that are customers of the century-old lender. Unlike public corporations -- which enjoy access to reinvigorated credit markets -- small borrowers are finding capital remains scarce.

Even if CIT emerges intact, its lending capacity could drop to less than 20% of what it was two years ago, according to an estimate by Brian Charles, a debt analyst at R.W. Pressprich & Co. CIT made just under $40 billion in new commercial loans in 2007, not including an additional $45 billion for trade financing, according to company figures. That plunged to just $4.4 billion in the first half of 2009.

CIT's bankruptcy filing "is a risky proposition," said Donald Workman, head of the bankruptcy practice at law firm Baker Hostetler. "It's far from a certainty that they will be able to exit ... because of all the challenges a financial services company will face, particularly in this market."

Other restructuring experts said CIT's plan puts it in good position to speed through court. "If you have a deal pre-negotiated, you have creditors locked up and you put out the right message ... companies can actually get fixed through bankruptcy and not lose their customers," said Jonathan Henes of Kirkland & Ellis LLP.

Under the bankruptcy plan, senior bondholders would trade their current debt for new debt maturing later worth about 70 cents on the dollar. They would get 92.5% of the equity in a restructured CIT. Junior bondholders would get the remaining equity in a reorganized CIT, but no new debt.

Large bondholders -- including investment firms Centerbridge Partners, Silver Point Capital, Capital Research & Management and Oaktree Capital Management -- gave CIT rescue loans over the summer to buy it time to restructure. They and other bondholders have committed $4.5 billion more to see it through.

CIT overcame one hurdle Friday, when Mr. Icahn reached an agreement with CIT, pledging to support the lender's bankruptcy plan and providing $1 billion in backup financing. CIT will tap the funds only if the $4.5 billion loan proves insufficient. "The prepack is giving up control and putting fair restrictions on capital use. That, to me, is a great victory for bondholders," Mr. Icahn said in an interview.

If CIT emerges from bankruptcy protection, the company still needs the Federal Deposit Insurance Corp. to lift a "cease-and-desist" order limiting its ability to raise deposits at its Utah bank, a key to implementing its new plan. A person familiar with the negotiations said CIT had received "positive" indications that the FDIC would approve all its requests, but cautioned a deal had yet to be reached. An FDIC spokesman declined to comment.

[J]

Even if CIT emerges intact, its lending capacity could drop to less than 20% of what it was two years ago, according to an estimate by Brian Charles, a debt analyst at R.W. Pressprich & Co. CIT made just under $40 billion in new commercial loans in 2007, not including an additional $45 billion for trade financing, according to company figures. That plunged to just $4.4 billion in the first half of 2009.

CIT Group's cash cow factoring business should remain profitable for now, it's not really going to get hit until retailers and other customers which use its services start dropping dead in droves. Their general lending business is as mentioned above, dead. This will eventually starve its customers of cash and resulting in a lot of small & medium sized businesses going under which then feeds back into its factoring operations and puts a squeeze there as well.

Christmas is going to be fun. If the container shipping reports don't pick up drastically in the next week or so, holiday sales this season will be down about 15-20% from last year based on the volume of goods being shipped around. This, and the CIT Group bankruptcy has the potential to cause a post holiday retail massacre.

[Count Chocula]

Holy shit phongn you almost gave me a heart attack! I saw CIT Group and thought "Citigroup, oh snap!" Then I realized CIT=/CITI. Phew. Logically speaking, I can see why CIT's factoring operations are cratering...if a company's receivables are going down 20, 30, 40%, it makes little sense to have a third party make your dunning calls...a room full of $10-$12/hr phone drones could do the job equally well in-house.

Their receivables collections have collapsed from $29 billion in 2008 to $15.7 billion in 2009, comparing y-o-y. Ouch. Cash flow from operations is down about 50%. Ouch ouch.

Their poor lending practices certainly lit the fuse, but the collapse of their factoring operations seem to have put the "BOOM" in their blowup.

[J]

Holy shit phongn you almost gave me a heart attack! I saw CIT Group and thought "Citigroup, oh snap!" Then I realized CIT=/CITI. Phew.

Well, if Citigroup went under we'd be having a banking holiday right now. That is, if there's any banks left after all the CDSs, CDOs, and other derivatives & synthetics are triggered and go off.