CIT Group Announces More 'Restructuring', But Bankruptcy Outcome Still Unclear

Throughout the week, a burning question has been on the lips of investors, bankers and business owners alike: “Is CIT filing for Chapter 11?” Despite a flurry of announcements Friday, no one is that much wiser.

CIT Group (CIT) has been slowly nearing bankruptcy since August, when it arranged a last-minute deal with its bondholders to delay the repayment of billions of dollars in short-term debt maturities. Throughout the fall, while other financial organizations have prospered, CIT’s directors have been focusing on trying to keep the firm alive.

Those strategies seem to be succeeding, but it’s still unclear to what extent. Today, the small business lender — whose survival many argue is crucial to a quick U.S. economic recovery — announced that it had arranged with Goldman Sachs (GS) to reduce an outstanding $3 billion loan to $2.13 billion.

Wednesday, hedge funds agreed to pony up $4.5 billion in order to help CIT fend off a hostile debt bid by Carl Icahn. Most recently however, the embattled lender appears to have made peace with the former Wall Street Raider: today, it said that it has agreed a deal where Icahn will provide $1 billion in financing if the hedge funds’ billions don’t turn out to be enough to see it through its troubles. (In return, Icahn agreed to back down from making bondholders a counter-offer for their notes.)

Here’s the problem: It’s a well known fact that Icahn wants CIT to file for Chapter 11. The same cannot be said for the firm’s directors however, many of whom are common stockholders and would take a substantial financial beating in the event of a bankruptcy. In fact, this week it appears that the company has been eager to dispel that possibility in the minds’ of market participants, as it has gravitated towards referring to its moves as just a “restructuring.”

On stock message boards, debate over this issue is rapidly turning downbeat: “The restructuring plan leaves nothing for the common holder. Looks like he’s (sic) screwed to me,” speculates one investor. Seeking Alpha reports in its Market Currents Section:

CIT Group (CIT) agrees to accept $1B in backup financing from Carl Icahn, to be tapped if it needs more than the $4.5B it accepted from other bondholders. For his part, Icahn will back down while the company restructures in bankruptcy; it plans to file as soon as Sunday night or early Monday and Icahn will vote for the plan. CIT’s debt exchange likely failed. Shares picked up a bit as trading resumed, now down 16%.

But for all the apparent certainty of a bankruptcy filing, the issue still remains far from clear-cut. For a start, it wouldn’t suit the political agenda of the current White House administration at all to be seen as bailing out Goldman Sachs but not saving a small-business lender. Secondly, if a CIT bankruptcy culminated in a Lehman Brothers-style fiasco, President Obama would be viewed by many as just another incompetent politician grappling with an economy and a stock market that he doesn’t quite get. In that case, it would be much easier for Treasury to execute a last-minute bailout of the firm and explain to taxpayers that this time, their money is actually saving their businesses.

Further, Goldman Sachs’ interests are hardly served in the event of a bankruptcy: it essentially gets a billion dollars less now than it would have a week ago in the event of Chapter 11. It’s hard to think that Goldman wouldn’t have mandated a no-bankruptcy clause in the negotiations of the loan reduction announced this morning.

It still remains to be seen what will transpire. But one thing is for sure: a CIT bankruptcy would a cost a lot of players a ton of capital: political and financial.

Disclosure: I own a small number of shares in CIT Group.

Comments

[EARLPEARL:]

i suspect goldman makes more off of heir credit default swaps than they would lose if they file ......only chance you have is obama don't hold your breath

Nov 01 08:39 AM

[RMG:]

It seems to me, that CIT will file for bankruptcy, structured or not, leading to share holders getting wiped out. Any comments from any body?

Nov 01 11:05 AM

[Peir:]

What do you think that Sun capital will be affected by the collapse of CIT Group and then what about Kellwood?

Nov 01 11:15 AM

[mahram:]

I dont want to bad mouth seekingalpha. But commentators like you seem to give alot of the writers here a bad name. You make alot of the writers here seem like they dont know anything about what they are writing about. Your citing the polical agenda of the WH. Except you forget that the adminstration is allowing this bankruptcy. All they needed todo was allow emergency fed funding, but they were denied. Goldman isnt losing any money on this, they will profit, from the cdo's they have on this company. As of this minute, Cit has declared bankruptcy. The clues to the bankruptcy would have been obvious. When ichan, came into support of the prepak, it was all but certain, then the deals with goldman, and the other debt holders for the prepak. You seem like a young guy, and not much experience in the financial world, but use this company as a learning experience, so you can grow.

Nov 01 02:10 PM

[mahram:]

wsj just reported cit declares bankruptcy, case closed. You make decent seekingalpha writers look bad man. Please respond.

Nov 01 07:01 PM

[shawn finan...:]

This will be tied up in the courts for years. Ichan lead the common stock holders to believe that they would receive 2.5% of the new company. Was he lying? is the next Enron or Madoff scheme? This will be looked into, and I wouldn't be surprised if arrests are made and the recovery may be compromised because of this.

Nov 01 08:10 PM

[RMG:]

Management and Board members have done a good job of keeping their (and employees' jobs) sacrificing share holders' interest. Until a few months back, they have been telling share holders that there will be a turnaround for the company with breakeven performance by the end of 2009

Nov 01 08:26 PM

[kennyhump:]

I am fairly sure that two maybe three men told me that the RECESSION was over. They were in high political places, if fact one of them called in from Copenhagen. Another was out on the campaign trail on behalf of Governor Corzine. I have been so happy since I got that word and knowing the CZARS are running the show. I know thousands of people who feel really good about the Countries Future. Also, I am sure our troops feel good about this news since they are doing nothing but trying to get out alive.
GOD BLESS AMERICA.

Nov 01 08:47 PM

[mahram:]

rmg, 2 months ago, 3 months ago, 6 months ago, 12 months ago, it was pretty obvious this company was going to file for bankruptcy. so dont tell me you knew any diffrence. if you looked at the business model it was clearly broken. the only thing I heard diffrent was a sliver that the government would bail them out again. But when the government refused to give them any more money or allow them to break the rules and take in more deposits, you knew it was a death knell.

Nov 01 08:55 PM

[User 507387:]

Could you give me the source of Ichan's words?


On Nov 01 08:10 PM shawn financial wrote:

> This will be tied up in the courts for years. Ichan lead the common
> stock holders to believe that they would receive 2.5% of the new
> company. Was he lying? is the next Enron or Madoff scheme? This will
> be looked into, and I wouldn't be surprised if arrests are made and
> the recovery may be compromised because of this.

Nov 01 10:01 PM

[User 507387:]

Could you give me the source of Ichan's words? Thanks

Nov 01 10:02 PM

[User 507387:]

Very sad. I bought some CIT days ago.
Some reports say Tax payer's 2.3 bn would lost, how can the common shareholders can get 2.5% of the new company? I guess 2.5% of the new CIT is not bad for common shareholders. At least it is not zero at all. Anyone can comment on the common shareholders' future?

Nov 01 10:19 PM

[User 100:]

User 507387, I feel your pain. I've been day trading CIT share lately and I caught them at a bad time. I imagine the shares will get transferred over to the Pink Sheets, where they will be basically worthless. The good part though is if you bought them a couple days ago it must not have been for very much. Short covering rallies on these kinds of stock can catapult them higher temporarily, so don't give up.


On Nov 01 10:19 PM User 507387 wrote:

> Very sad. I bought some CIT days ago.
> Some reports say Tax payer's 2.3 bn would lost, how can the common
> shareholders can get 2.5% of the new company? I guess 2.5% of the
> new CIT is not bad for common shareholders. At least it is not zero
> at all. Anyone can comment on the common shareholders' future?

Nov 01 11:55 PM

[RMG:]

As of the middle of this year, CIT and its operating units had $71 billion of assets and $64.9 billion of debt.

CIT is restructuring, which involves $10B debt reduction and debt holders owning the equity. This implies, assets of $71B, new debt of $54.9B (64.9-10) and an equity of $16.1B (71-54.9). In other words, debt holders’ debt of $64.9B will be replaced by a new debt of $54.9B and $16.1B of equity for a total of $71B. No wonder, debt holders agreed.

What is wrong with this logic?

Nov 02 01:10 AM

[hilo man:]

I think Daniel Harrison's article was well-considered and totally on the mark. Unlike many other reports, Harrison considered the motivations of the Board and based on these considerations, expressed doubt that CIT would file. Of course, now the BK filing has occurred, some of us are left to wonder what motivated the Board to agree to file knowing that stockholders would get nothing if the pre-pack is approved. After all, the Board works for stockholders, not bondholders. At the time of filing, CIT's assets exceeded liabilities, so this difference represents stockholder equity (and potential dividend payments) had the filing not taken place. Am I one of the few people to wonder why they took this action....wiping out not only stockholders, but their own stock values as well? Is there a story there? Is it possible that the Board was actually acting in the interest of stockholders and we are yet to learn the details?

Nov 02 02:29 AM

[The Greates...:]

Welcome to the party Citi.

Nov 02 09:17 AM

[Daniel Harr...:]

I'm sorry that you feel this way. Of course, in the end CIT ended up filing for bankruptcy, but it was my (erroneous, as it turned out) opinion that a Chapter 11 filing was being overplayed by the media at the end of last week, based on all the different interests of the various actors involved.

I should add that I own a materially insignificant amount of stock, but it is a matter of proper disclosure to make even that clear. I also waited until after market close Friday to publish this piece, since it wasn't designed to affect trading in the stock in any way. Rather, it was just a point of view that turned out to be way off. For that, I make no apologies, since in this case the egg is already on my face!


On Nov 01 07:01 PM mahram wrote:

> wsj just reported cit declares bankruptcy, case closed. You make
> decent seekingalpha writers look bad man. Please respond.

Nov 02 09:31 AM