Commercial lender CIT group files for bankruptcy

CIT had fought activist investor Carl Icahn, who said he was CIT’s largest bondholder, over its future plans. But late last week the two resolved their differences. Most of CIT’s creditors have already approved its reorganization plan, and the company said it hopes to emerge from bankruptcy by the end of the year, around when Chief Executive Jeff Peek is slated to resign.

Getting through bankruptcy quickly is crucial for CIT if it wishes to keep its customers, which include Dunkin’ Donuts franchisees and film producer Dark Castle Entertainment.

“The longer a financial institution stays in bankruptcy, the more the value of the business dissipates. It’s faith and trust and perception that are so important for a financial institution,” said Jack Williams, a bankruptcy law professor at Georgia State University College of Law.

CIT does intend to stay in business, and its operating subsidiaries were not part of the New York bankruptcy court filing. CIT is still making new loans and honoring commitments to fund customers, people familiar with the matter said.

Once CIT emerges from bankruptcy, it hopes to move businesses including vendor finance, which companies use to offer financing to their customers, and factoring, which helps companies finance their unpaid bills to customers, into its bank subsidiary. If regulators approve the move, CIT hopes to fund new loans and leases for those businesses with bank deposits.

S&P 500 stock index futures opened slightly lower on Sunday and the US dollar edged higher as news of the bankruptcy spurred traders to reduce risk-taking.

The bankruptcy filing is unlikely to crater financial markets, said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California, but he noted it’s not a positive. “If anything it may be psychological and weigh on people’s mind about how things are overall. It adds to peoples’ question marks about how healthy the economy is,” Hanlon said.

CIT, which filed for protection under Chapter 11 in the Southern District of New York, plans to reduce its total debt by about $10 billion in bankruptcy. As of the middle of this year, CIT and its operating units had $71 billion of assets and $64.9 billion of debt. That would make CIT’s bankruptcy one of the largest in US history, although most of the assets are not at the holding company that filed for protection from creditors.

Under the bankruptcy plan approved by CIT’s lenders, creditors will end up owning the company. Most bondholders will also end up with new CIT debt whose face value is about 70 percent of the face value of their old debt. Preferred shareholders, including the US government, will get money only after lenders are paid back. The US Treasury acknowledged it will likely end up with little.

“We will be following developments very closely with an eye towards protecting taxpayers ... but as the company’s disclosure on the prepackaged bankruptcy makes clear ... recovery to preferred and common equity holders will be minimal,” Treasury spokesman Andrew Williams said.

The new CIT debt is secured by about $30 billion of assets. Those same assets secured about $7.5 billion of financing that CIT has received in recent weeks. To the extent CIT has further difficulty repaying debt, the lenders of the $7.5 billion facilities are first in line to be paid back from the roughly $30 billion pool.