Bankruptcy

CIT Preparing For A Chapter 11 Bankruptcy Filing? What Happens To Its Borrowers?

By Scott Riddle

Lender CIT has been a business lender for 100 years, and is (at least for now) a Fortune 500 company.  It is mainly a lender to small to middle market businesses and according to its website has $60 billion in financing and leasing assets.  Lawyers who handle Chapter 11 cases have undoubtedly crossed paths with CIT many times.  The docket for the Northern District of Georgia has several pages of various CIT entities involved in bankruptcy cases.

Late last week, the news spread that CIT was preparing for a Chapter 11 filing after it lost a bid to get government assistance (as GE Capital obtained) and hired Skadden Arps. Click here for WSJ article and here for Bloomberg.  Apparently, the FDIC thought guarantees to CIT would have been to risky for taxpayers.  Shares trading at over $61 fell to $1 yesterday and it has hit junk bond status.

The Wall Street Journal Bankruptcy Blog raises doubts about CIT's ability to succeed in Chapter 11:

The company's main problem: Some $2.7 billion in debt due from now until the end of the year that investors aren't sure the company can cover...

But there are some considerable differences between industrial giants like GM, and financial companies that might make CIT's survival in bankruptcy a less certain situation. 'It runs the risk of hurting the deposit base and maybe causing some regulatory action from the FDIC or the Fed,' said Stifel Nicolaus analyst Chris Brendler, in a brief chat with MarketBeat. 'I don't think you'll see many finance companies survive a bankruptcy filing.' 

According to the NY Post, the consequences of a CIT failure could be catastrophic:

Hundreds of thousands of small businesses, shops and restaurants -- CIT CEO Jeff Peek estimates some 760 manufacturing companies and another 300,000 retailers -- could be shut down overnight in a collapse of CIT, their main lifeline to cash and credit.

 From Bloomberg:

'CIT has been an especially important source of funding for small businesses, which we know is the engine of job growth in our economy,' said Representative Carolyn Maloney, a New York Democrat and congressional Joint Economic Committee chairwoman, in an e-mailed statement. 'If they could no longer lend, it would cause disruption across the country to countless small businesses.'

It remains to be seen what CIT will do, but it will probably happen in days or a few weeks, and not months.  If CIT fails, or continues to significantly restrict its lending, the Bankruptcy Courts will see a jump in business because few lenders will be ready, willing and able to step into their shoes (at least, not without a bailout guarantee).

However, Treasure Secretary Timothy Geithner stated yesterday that the government has the authority to address the CIT situation.  With the nationalization of GM, the statement is no surprise. 

Full post as published by Georgia Bankruptcy Blog on July 14, 2009 (boomark / email).