Nov. 2 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial lender that saw its funding dry up in the credit crunch, 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 a Chapter 11 petition yesterday in U.S. Bankruptcy Court in Manhattan. The 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 lender, which funds about 1 million businesses such as Dunkin' Brands Inc. and Eddie Bauer Holdings Inc., 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.
"Short term, it's going to cause some difficulties for startups and smaller borrowers," said Jean Everett, a partner at Hiscock & Barclay LLP 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."
The bankruptcy, the fifth-largest by assets, "will allow CIT to continue to provide funding to our small business and middle-market customers," Chief Executive Officer Jeffrey Peek said yesterday in a statement. CIT said it will attempt to emerge from court protection by the end of the year. Shareholders may be wiped out as common and preferred stock is likely to be canceled when the company ends its reorganization.
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 New York-based 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.
"We've been arguing for this type of result all along, whereby the bondholders can control the company's fate and where management can't just squander the company's resources," said Egan-Jones Ratings Co. President Sean Egan. "I think this outcome is absolutely fantastic."
The failure of CIT's bank-holding company is the biggest measured by assets since regulators seized Washington Mutual Inc.'s 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 U.S. Securities and Exchange Commission.
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 yesterday 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.
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 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.
Peek, 62, who joined CIT in 2003 after failing to land the top job at Merrill Lynch & Co., moved 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.
The lender's bankruptcy filing was made by Skadden, Arps, Slate, Meagher & Flom LLP, which the company said on July 11 it had hired as a legal adviser.
The case is In re CIT Group Inc., 09-16565, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).
To contact the reporters on this story: Tiffany Kary in U.S. Bankruptcy Court for the Southern District of New York in Manhattan at firstname.lastname@example.org and; Dawn McCarty in Wilmington, Delaware, at email@example.com .