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CIT Group Makes Peace With Carl Icahn
Embattled lender CIT Group has finally made peace
with billionaire Carl Icahn, who is the company's biggest bondholder. Icahn had been opposing CIT Group's latest plan to reorganize with a bondholder debt swap. But after furious negotiations, all parties have tentatively agreed on a solution. CIT Group is so deep in debt that the fix had to be a big one.
CIT will file for chapter 11 bankruptcy this weekend and present the court with a prepackaged plan of reorganization that all creditors have supposedly agreed to. The court will approve it and then CIT emerges from bankruptcy. That's the plan, anyway.
CIT has agreed to accept $1 billion in backup financing from Mr. Icahn, which it would tap if it needs more than $4.5 billion it recently received from other bondholders, these people said. CIT stock was halted on the news.
As part of further discussions with CIT, Mr. Icahn has agreed to back down while the company restructures in bankruptcy court. CIT launched a debt-exchange offer about a month ago while also asking bondholders to vote on a prepackaged bankruptcy plan.
The results of CIT's debt-exchange offer have not yet been finalized, but people close the company said it had likely failed. Meanwhile, the company had cleared significant hurdles that would give it more support than it needs for its prepackaged bankruptcy plan, a person familiar with the matter said.
The company plans to file for bankruptcy in New York as soon as Sunday night or early Monday, said people familiar with the matter. CIT is poised to enter bankruptcy with enough creditor support to approve its reorganization plan and shorten its stay in Chapter 11, these people said.
CIT and Mr. Icahn declined to comment.
The deal comes as Mr. Icahn has so far failed to persuade bondholders to block CIT's restructuring plan, these people said. The billionaire investor tried to derail CIT's restructuring plan by offering bondholders 60 cents on the dollar to vote down the lender's debt-exchange offer and prepackaged bankruptcy plan.
So why is everyone so determined that CIT Group not fail? Well, other than the fact that the investors don't want to lose their money, there is the fact that if CIT Group fails, it will cause a chain reaction in the U.S. economy as potentially thousands of businesses which rely on CIT Group for short term financing could also fail if they can't find other sources of credit to finance inventories. That would be very bad indeed.
Posted on October 30, 2009
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Carl Icahn Calls CIT Group Board Incompetent, Offers $6 Billion Loan
Billionaire financier and shareholders' rights activist Carl Icahn has offered troubled commercial lender CIT Group a way out of its difficulties. Icahn, who is CIT Group's largest creditor, has offered to loan CIT another $6 billion.
So why would he do that? Clearly he's worried about his underlying loan and he really does not like the restructuring plan that has been proposed with bondholders. In fact, he thinks it's a terrible deal. He wrote a blistering letter to what he refers to as CIT's s "incompetent and unconscionable" board of directors. He thinks the bondholder swap is just a way to buy votes and says he can save the company $150 million in fees if he makes the loan.
In a letter to CIT's board, Icahn said the loan would save the company $150 million in fees to prospective lenders, and would not force bondholders to vote for a revised debt exchange. Icahn in his letter criticized the proposed $6 billion in a secured term loan being offered by the company as a "bad-faith attempt to buy votes for the company’s exchange offer/plan of reorganization, since all prospective lenders must vote their CIT debt in favor of the company's plan in order to receive an allocation of the new loan." He also chastised the proposed prepackaged bankruptcy plan because it would give the board "releases against certain claims that shareholders and bondholders would have against them."
CIT in response said on Monday that it intends to "ask Mr. Icahn for more information regarding his proposal."
The lender to small businesses and middle-market companies added that, while it has developed a restructuring plan in consultation with a steering committee of CIT lenders, it “remains open to securing financing on the most beneficial terms.”
Michael A. Gallo Jr., head of the finance group at the law firm DeCotiis, FitzPatrick, Cole & Wisler, noted Icahn’s offer fails to address the restructuring plan.
"The whole purpose of the restructuring is to exchange some of the debt for equity so CIT wouldn’t have to repay it. If you're trading one loan for another, you’re not accomplishing [any restructuring], just pushing off the [debt] obligation to another time," Gallo said.
Now that Carl Icahn has waded into the fray and essentially said that the CIT Group Board of Directors is either incompetent, a bunch of crooks, or both, things are bound to get a bit sticky. We're not sure where all this ends up. Icahn admits that he and the Board generally don't get along (that's putting it mildly) and says if they don't want to take the money from him to clear existing debt, that there are plenty of banks that would finance the deal in a way that would be better for the company than this bondhlder debt swap plan.
The board is unlikely to take money from Icahn; it seems more likely that he is doing this to expose what he claims as mismanagement and to stop a bad deal.
Some analysts say CIT is too big and too crucial to American retailers to be allowed to fail, but in these uncertain economic times anything could happen.
Posted on October 20, 2009
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