CIT Group files for Chapter 11 protection
November 2, 2009-- Casual Living,
CIT Group filed for Chapter 11 bankruptcy protection Sunday, in an effort to wipe away billions of dollars of debt after bondholders rejected an alternative debt-swap offer.
The company, a major factoring lender to the furniture industry and a key lending source to small to midsized businesses, said none of its operating subsidiaries were included in the prepackaged filing in New York, and are expected to continue operating.
About 90% of the CIT debt holders voting through last week chose bankruptcy over a debt exchange plan that the company floated. In a release, CIT said it expects a quick court confirmation of its reorganization plan. It also expects to cut it total debt by about $10 billion, reduce its liquidity needs and "enhance its capital ratios and accelerate its return to profitability."
According to a Bloomberg story, the U.S. Treasury Department doesn't expect to recover much of the $2.3 billion in taxpayers' money that went to CIT in an earlier bailout.
"The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy," said CIT Chairman and CEO Jeffrey Peek.
"This market-based solution allows CIT to enter into the reorganization process well-prepared and positioned for swift emergence," he said.
CIT said it is the largest factoring company in the United States.
Last week, it secured a new $4.5 billion credit facility as well as an additional $1 billion from bondholder Carl Icahn that will be used as a debtor-in-possession loan.
In its filing, CIT also said Bank of America has agreed to provide it with a new $500 million senior secured credit facility to issue letters of credit, which are particularly important to continue to support its trade finance business obligations.
In the Chapter 11 petition, the company listed $71 billion in assets and $64.9 billion in liabilities. Under the prepackaged plan, all of CIT's common and preferred stock will be canceled upon emergence.
CIT Group said in court documents that the company lost access to certain commercial paper markets because of credit downgrades in 2008. That led it to draw down several revolving credit facilities.
The company's biggest liabilities were long-term borrowing of $54 billion. Its next greatest liabilities are credit balances of factoring clients of $2.7 billion and deposits of $5.4 billion.
As of June 30, CIT's trade finance segment, which handles furniture factoring, among other items, held assets of $5 billion, or 7.9% of the company's total finance and leasing portfolio assets.
"Most of us in the home furnishings business have a hard time understanding the whole financing structure and complexity thereof of a company like CIT," said Jim Ziozis, CEO of importers Linon Home Décor Products and Powell. "The filing shows assets of $71 billion; you can't get your hands around numbers like that."
But Ziozis said it's clear that CIT's division handling factoring and lending to wholesalers, retailers, importers and distributors "has been profitable for decades and is still one of the crown jewels of the holding company."
"I don't think bankruptcy is something anybody in the industry wanted to see on CIT," he said. "However there have been question marks on CIT for almost a year, and at least this brings some clarity and a plan, because until now, there were many different suggested plans that were reported in the financial media.
"My opinion is they start getting their financial house in order, and then they focus on maximizing their core profitable businesses, which I think is positive for the whole home furnishings, wholesale and retail industry along with other wholesale/distribution businesses that work with the retail trade," Ziozis said.
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