Embattled CIT Group Files For Bankruptcy

Posted by: Stacy Perman on November 2, 2009

After several months of twists and turns in an effort to avoid bankruptcy, on Sunday CIT Group put an end to its ongoing saga and indeed filed for a prepackaged bankruptcy plan. Under the plan, the 101-year-old lender will end the year out of court protection and under the control of its debt holders.

The company released a statement that said, in part: “Under the plan, CIT expects to reduce total debt by approximately $10 billion, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability.”

CIT’s latest move comes after the firm attempted to find any avenue but bankruptcy that would keep it afloat. In July, the company was denied a second federal bailout after it had already received $2.3 billion in Troubled Asset Relief Funds (TARP). The government’s lifeline was given in the form of preferred stock – and as a result of CIT’s bankruptcy proceedings, the government is expected to take a bath on that $2.3 billion.

To date, CIT has been the biggest player in factoring – a form of debt financing used by those businesses that are unable to secure traditional loans or credit lines. This allows companies to sell their receivables at a discount in return for cash. A number of suppliers and manufacturers such as apparel makers deploy factoring as way to hold them over until retailers pay.

One of the biggest questions now is how CIT’s own considerable problems will impact the retail sector — particularly with the crucial holiday season just around the corner. Last July, when the company announced that it had failed in its bid to secure a second government rescue retailers were girding themselves for the possible fallout. However, the worst-case scenario appears to have passed.

Craig Shearman, the vice president for government affairs at the National Retail Federation, a trade group, says that the timing of CIT’s bankruptcy has actually boded well for retailers. “We think we dodged a bullet for the holiday season,” he says. “If there had been a collapse in September it could have created a hole in the retail supply chain big enough for Santa Claus to drive his sleigh through. At this point, most merchandise is either in distribution centers or already on store shelves.”

So for now, CIT will be added to the growing list of taxpayer agonies. And as one of the largest corporate bankruptcies, it has demonstrated that it was certainly not too big too fail.

Back in September when the company was battling to stay alive and defending its decision to keep Peek on, I spoke with banking consultant Bert Ely, who had taken a look at CIT’s numbers and concluded: “Barring a miracle, CIT will end up in bankruptcy no matter who is CEO.”

Now that the company has indeed filed, I spoke once more with Ely. “I think it was almost the only step that they had available to them,” he told me. “It just wasn’t fundamental problems, but they had too much debt and their credit ratings were too low. Therefore they couldn’t earn a wide enough net interest margin to cover their operating expenses. Going forward the only way they could survive in the long term was to basically improve their credit ratings and the only way to do that is to convert debt to equity – and that is essentially what will happen with this prepackaged bankruptcy.”

In this scenario, the bondholders (along with the federal government) will take the biggest hit. CIT said that none of its operating subsidiaries (such as CIT Bank and Utah state bank) will be included in the filings, enabling its operating entities to more or less continue to run smoothly.

In the short term at least, CIT will emerge with a stronger balance sheet. The more difficult challenge for the company however will be if as Ely says, “it will still be considered a viable business going forward.” CIT which lends to some 1 million small and medium sized businesses has seen a number of its customers abandon them, concerned about securing their own financing.

Reader Comments

Mike Mallett

November 2, 2009 1:36 PM

"the government is expected to take a bath on that $2.3 billion."
The taxpayers are going to take a bath on that $2.3 billion.

Blaine Molsberry

November 2, 2009 1:54 PM

I haven't seen what the regular bond holders ended up with. I believe they will get new bonds at less value then the orginals. Let me know if you find out.
Signed,
A bond holder that bailed at 52 cents on the dollar in Sept.

Squeezebox

November 2, 2009 2:03 PM

The Chineese are gonna have a fit! Who's gonna pay for all that junk?

Ray LaPlante

November 2, 2009 2:12 PM

Let's have a look at the executive bonus and compensasion package for the last year.

len

November 2, 2009 4:00 PM

thanks a lot Geithner/Kissinger, Obama/Rubin/Emmanuel. Nothing changes, nothing.
banks get bailed, taxpayers get fleeced, troops to another war zone, Obama defends another corrupt regime in Kabul. Nothing changes. wait until taxes start zooming up next year while inflation is poised to explode on us all. where are the jobs? how much baloney can you swallow on TV shows- we aren't idiots!

Zap

November 2, 2009 4:26 PM

What would happen to the common share holder like me and others who have stocks with CIT?

Tri Nguyen

November 2, 2009 4:41 PM

2.3 Billions can keep a considerable numbers of poor homeowners in their home. The US government even Mr. Obama is working for the rich and US corporations. When I was in a Communist country, the US government betrayed the communist regime who gives their people just enough to eat and die. I live in the US, I see most of Americans struggle to pay their interests to the Banks, Corporations, their CEOs. Americans are even poorer than the people in Communist nations as American people have to take high interest loans to pay for their homes and cars while most people in other developing countries use their savings for shelters. Debt is one of the cause of deteriorating American people's health. CIT is another example of how corporate America has robbing poor and middle class Americans. It also strengthens the crucial benefit chain of Corporation-Government. The Obama is taking political cash from companies, so he has to promote laws to benefit them in return. If no money involved in selecting civil servants, the political system would be honest without corruption.

joe

November 2, 2009 5:16 PM

Tri Nguyen,

I grew up in Southern China. Not far from Vietnam. I have to say that there is no excuse to be poor in America, unless the person is mental or physically sick. The people on the top are robbing the middle class. The people on government handouts are robbing the middle class too. And actually the lazy people on government handouts are steals much more than the people on the top, because of the sheer number

Zap

November 2, 2009 5:32 PM

The Obama Administration..WOW...what I thought it to be a dream turned out to be worst nightmare. We the people got screwed too many time by this administration, and by the companies it bailed out. Please not ethat the screwing is not over. First, 780 Billion of the peoples tax money was given to banks and corporations to keep screwing us with high interest loans, and credit cards and crap like that. why? to save the economy?!!! while many of us lost their jobs and homes and still strugling to survive, these banks get to thrive again on our account. I always thought the economy florishes with the peaple spendings, not but reviving banks that are worthless scumms, and how do we the people spend moneys we dont have. Simply All I'm saying is 780 Billion bailout money devided by the number of families in America would have solved the economy crises by now, the government would not have lost billions in vain. we the people would have given it back by Christmas.

Pierre

November 2, 2009 5:55 PM

The problem with the US and especially rich countries in general, is that the people/government live way over their limit.

Stop spending! A rich country is made with rich individual.

joe

November 2, 2009 6:01 PM

What would happen to the common share holder? You bought some assets with risks and CIT filing bankruptcy was one risk. Say goodbye to your risky investment...

Dave

November 4, 2009 10:57 AM

The story reminds the need in risk management in the supply chain.

it seems that CIT’s bankruptcy happened in the best possible way and is "all goodness". how much was planned and how much is luck is tough to determine
There are two factors:
1. Had the filing not been pre-packaged with creditor approval
2. Had it happened 2 months ago, the industry may have been in trouble.
If the confluence of these two things did come together, CIT's bankruptcy could have been devastating to the holiday season and the entire apparel industry would have found itself in a disastrous situation.

Our company, Minet Technologies, offers a unique workshop for risk management in the supply chain http://snipr.com/t1f1c

Cheers,
Dave

Jess Le

November 4, 2009 5:00 PM

Tri Nguyen ,

I don't understand what obligations does the US goverment have with the Communist regime in Vietnam after 1975 ? Because the US did not hand out money to them and you called that is betrayal?

You said the American are poorer then the people who live under Communist goverment , why are the Communist party of Vietnam keep asking and taking American hand out for years ? The fact is American average income is 47.000 USD/year compare to the Vietnamese under Communist ruler only making around 1.000 USD/year ? Now tell me who have a better standard of living ?

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