CIT Group has met at least one of the hurdles necessary to file for a pre-packaged bankruptcy, sources said, bringing the commercial lender one step closer to the fast bankruptcy process it is seeking to lower its liabilities and get back to health. Holders of about 90 percent of its unsecured bonds have approved the pre-packaged bankruptcy, two sources familiar with the matter said late Friday.
The company needed two-thirds approval. But the company is still counting ballots to see if half of the voting bondholders have approved the deal, a necessary condition, according to a person familiar with the matter. The 101-year old company is widely expected to clear that hurdle, and could file for bankruptcy as soon as this weekend.
CIT had been working hard to win bondholder support for its plan to restructure, and earlier Friday announced key agreements with creditors, including support from Carl Icahn, who had previously been the main opponent to the company's plans. CIT also announced an agreement with Goldman Sachs Group that would reduce a $3 billion credit line to $2.125 billion but, critically, keep the line open during a bankruptcy.
"It looks like everything is pointing to a prepack," said Adam Steer, an analyst at CreditSights in New York. "Their best option is to turn off the lights and work their balance sheet down. It's pretty clear at this point." The pre-packaged bankruptcy plan involves giving bondholders new debt worth 70 pct of the face value of their old debt, plus giving them an ownership stake in the company equal to about 92.5 percent of the common stock.
Current preferred shareholders, including the government's $2.33 billion paid to CIT under the Troubled Asset Relief Program, will be converted into 5 percent of the company's common stock. Current common shareholders will get 2.5 percent of the new company.
CIT warned last week that if investors did not support its restructuring efforts, it could end up filing for bankruptcy without a plan for how to fix itself. Exiting bankruptcy could take a long time and destroy much of the company, CIT's management said in a presentation.
"We're all glad this is behind us and that we can now consummate this transaction and hopefully make bondholders some more money," said Jeff Werbalowsky, chief executive of Houlihan Lokey, the adviser to CIT bondholders. "The company did the right thing in putting this behind us, and that's where this needs to be for a quick and successful restructuring."
CIT was once the largest lender to small and medium sized business in the United States. It said in a presentation earlier this month that it hopes to move key operations, such as vendor financing and small business lending, into its bank unit. That bank unit can then fund lending through deposit borrowing. CIT fell victim to the credit crunch, which lifted its borrowing costs, and the recession, which left it with increasing numbers of bad loans.
ICAHN SUPPORT Icahn, who says he is CIT's largest bondholder, said in a statement that he changed his mind on the pre-packaged bankruptcy plan because he was pleased by changes the company made, including establishing an accelerated process for appointing new directors. Shares in cash-strapped CIT slumped 22.5 percent to 73 cents, as investors took the announcement as an indication that the pre-packaged bankruptcy plan would go ahead.
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