CIT Group Inc., the commercial lender and the leading factoring company in the U.S., filed for bankruptcy in an effort to cut $10 billion in debt following a failed debt exchange and U.S. taxpayer bailout.
CIT listed $71 billion in assets and $64.9 billion in liabilities in its Chapter 11 petition in U.S. Bankruptcy Court in Manhattan. The Treasury Department said the government is not expected to recover much, if any, of the $2.3 billion in taxpayer money that went to CIT.
The lender said it plans to exit court protection quickly due to support from bondholders, who voted for a '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.
“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,” said Jeff Peck, chairman and CEO. “We are enormously appreciative of the extraordinary support we have received from our many constituencies. This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for a swift emergence. I want to thank our customers for their support and express my gratitude to our employees whose dedication and hard work are crucial to the future of CIT. We also acknowledge our constructive working relationship with our regulators and look forward to their continued guidance as we move through this process.”
CIT said it will attempt to emerge from court protection by the end of the year.
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.
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 counting 150,000 ballots. Debt holders rejected the exchange offer, with 90 percent of holders who voted opting for the company's prepackaged bankruptcy plan.
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.
The lender, which reported $3 billion of losses in the past eight quarters, received $2.3 billion from the Treasury on Dec. 31, giving the U.S. 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 in an e-mailed statement sent to Bloomberg. “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.
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 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% 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.