CIT Prepares to File for Bankruptcy

Jul.12.09 | About: CIT Group (CIT)

The WSJ reporting that CIT, the lender to over 1 million small sized businesses, has hired Skadden Arps in preparation of a bankruptcy filing. The formerly largest competitor to GE Capital (NYSE:GE) for any and every semi- and fully-toxic loan imaginable, has been so far outright denied a bailout by an administration that has rarely professed a non-socialist approach to corporate demise.

Unfortunately for the company, whose new HQ office lobby on 42nd Street looks more like a club out of meatpacking flashing either a blue or deep purple colored decor, may be Obama's first Guinea pig in financial failure since Lehman.

CIT Group Inc., a lender to almost a million mostly small and midsize businesses across the country, is preparing for a possible bankruptcy filing after so far failing to win a government guarantee to help it borrow, said people familiar with the matter.

CIT declined to comment on whether it was preparing a filing or why it had retained Skadden Arps. But if CIT did file, the consequences could be considerable, because the 101-year-old company, as of March 31, had $68 billion of liabilities.

A bankruptcy filing by CIT could affect thousands of small borrowers, from Dunkin' Donuts franchisees to restaurant owners andclothing retailers. "If CIT were to go away, it would take a financing option away from franchisees who want to buy stores or expand their networks," said Kate Lavelle, chief financial officer of Dunkin' Brands, the which owns Dunkin' Donuts and has had a 50-year relationship with CIT.

On Friday, many CIT bonds slumped on heavy trading, and its stock tumbled to its lowest since the lender went public in 2002, further hurting its chances of raising capital from the private sector without more government aid. CIT bonds that mature in February 2010 were trading at 83.5 cents on the dollar and yielding over 40%, indicating that debt investors think it is unlikely they will be repaid in full. CIT shares sank 33 cents, or 18%, to $1.53, after dipping as low as $1.13 during the day.

According to confidential documents reviewed by The Wall Street Journal, CIT has in recent weeks tried to assess the consequences of a failure of the lender on Middle America. Among them: Companies would lose access to $4 billion in untapped credit lines and thousands of manufacturers could run into problems.

If "run into problems" isn't the most greenshoot colored euphemism for a virtual halt in credit line access for small and medium corporations (that nobody really even wants now in the first place), I don't know what is. However, as in the Lehman failure, the CIT bankruptcy will merely expose the thousands of unintended consequences that the government, in its newly minted centralized planning role, has no possible way of fully evaluating, and the pain could likely be as pervasive and acute as last September.