For Existing Borrowers of CIT, Bankruptcy Filing Should Have No Effect
11/2/2009
CIT Group Inc., a leading provider of financing to small businesses and middle market companies, and its indirect, wholly owned subsidiary CIT Group Funding Company of Delaware LLC (together, CIT), filed for Chapter 11 protection yesterday in the U.S. Bankruptcy Court for the Southern District of New York (Manhattan). Importantly, none of CIT’s operating subsidiaries, including CIT Bank and CIT Healthcare LLC, were included in the filings. As a result, CIT expects that all operating entities will continue normal operations during the pendency of the cases. (CIT Group, Inc. is a client of Waller Lansden Dortch & Davis, LLP.)
Simultaneously with the filing of the petitions, CIT filed a prepackaged plan of reorganization that had been negotiated and approved by the CIT Board of Directors prior to the bankruptcy filing. The plan obtained overwhelming support from CIT’s bondholders. As a result, the company may be able to emerge from bankruptcy protection by the end of the year and reduce its debt by approximately $10 billion. Under the plan, bondholders will exchange their debt for new debt that matures later, and nearly all the equity in a reorganized CIT. The company’s preferred shareholders, including the U.S. Treasury, which received preferred shares in connection with $2.3 billion in TARP funds invested in CIT last year, and common equity shareholders, will likely be wiped out or receive a minimal recovery.
CIT has reported efforts to obtain sufficient liquidity to maintain operations and satisfy client needs during the plan confirmation process. Recently, CIT increased its $3 billion credit facility by another $4.5 billion, and on Friday, CIT received a $1 billion supplemental line of credit from Carl Icahn to fund operations as CIT pursues confirmation of the plan. In addition, CIT is seeking permission from the bankruptcy court to enter into a new $500 million secured letter of credit facility with Bank of America.
Although it is too early in this bankruptcy proceeding to predict an outcome, because of CIT's expectation that all operating entities will continue normal operations during the pendency of the cases and the steps it has taken to maintain liquidity, it appears that CIT’s current borrowers will not be affected by the bankruptcy.
CIT Healthcare, CIT Bank and other CIT operating subsidiaries should continue performing their duties as administrative agents, as collateral agents and in other agency roles. With a confirmable plan on file and sufficient liquidity available, CIT plans to emerge from bankruptcy protection by the end of the year, which should minimize any disruption to its customer base.
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