As expected, lender CIT Group filed
for Chapter 11 bankruptcy today. It is the fifth largest bankruptcy proceeding in U.S. history, behind Lehman Brothers Holdings Inc., Washington Mutual Inc., Worldcom Inc. and General Motors Corp. CIT listed $71 billion in assets. CIT has a Utah bank which is not part of the filing: it has $10 billion in assets.
CIT is going into Chapter 11 with a prepackaged plan that the bondholders, including billionaire Carl Icahn, have already signed off on.
If the bankruptcy goes as planned, CIT will emerge from bankruptcy and go back into the lending business. Common shareholders and the U.S. government will lose big.
One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said.
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Under the bankruptcy plan, senior bondholders would trade their current debt for new debt maturing later worth about 70 cents on the dollar. They would get 92.5% of the equity in a restructured CIT. Junior bondholders would get the remaining equity in a reorganized CIT, but no new debt.
Analysts have mixed opinions on whether the strategy is going to work. Some say that even if CIT emerges from bankruptcy it will only be able to make 20% of the loans it used to make to keep small businesses -- and many retailers -- afloat. Others disagree, saying that the capital markets are recovering and with certain needed FDIC approvals regarding the Utah bank that CIT will be back in business as before.
