The CIT Group, Inc., a provider of financing to small businesses and mid-market companies, including healthcare providers and vendors, ended four months of frenzied negotiations by filing for Chapter 11 bankruptcy protection on Nov. 1.
The news affected a wide number of small and mid-sized American businesses that had been financed by the 101-year-old company as well as the American government, which had provided the company with $2.3 billion in bailout funding earlier this year – the first such loss for the federal program.
The news wasn’t all bad – at least according to CIT officials and some analysts. The New York-based company had secured $5.5 million in credit in two deals announced shortly before the bankruptcy filing, and the company filed a so-called “pre-packaged bankruptcy plan,” which seeks to limit the damage incurred by its clients and pave the way for an organized recovery.
“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 Jeffrey M. Peek, chairman and CEO, in a press release. “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.”
In the bankruptcy filing, the fifth largest in U.S. history by assets, CIT listed $71 billion in assets and $64.9 billion in liabilities. CIT officials said that only its holding company was filing for bankruptcy, and that most of its important operating subsidiaries, including its Utah bank, would continue to operate normally.
The company had disclosed its financial problems in July, and failed to win a second bailout from the federal government. In October, officials launched an ambitious plan to exchange roughly $30 billion in debt for new securities, but that plan was vetoed by bondholders, who voted instead for the pre-packaged bankruptcy plan that keeps the company operating and cuts $10 billion in unsecured debt.
Fueling that plan are two deals, one boosting CIT’s credit facility from $3 billion to $4.5 billion with help from several investors, and a second leveraging $1 billion in “supplemental liquidity” from billionaire investor Carl Icahn, described as the company’s largest investor, who had balked at supporting the bankruptcy plan until receiving assurances from the company on management changes.
CIT has also asked for court permission to borrow $500 million from Bank of America Corp., saying the loan would fill a financing “void” after other lenders refused to extend more credit.
Bondholders will receive about 70 cents for each dollar owed them through the prepackaged bankruptcy. CIT officials had said investors would have received as little as 6 cents on the dollar in the alternative, a free-fall bankruptcy that lacked a pre-approved reorganization plan.
CIT had seen its assets jump 77 percent from 2004 to 2007, but has lost $5 billion in the past two years and seen its stock drop more than 80 percent this year to less than a dollar, after trading as high as $61 in February 2007.