CIT’s Bankruptcy Filing Expected in Days, the U.S.Government Infusion of $2.3 Billion at Risk. Financial firms such as CIT have historically been sold off or wound down after a Chapter 11 filing; for fear that customers will cause a run on the bank. But CIT expects to have enough creditor support to complete a prepackaged reorganization by year-end, a relatively short period for a bankruptcy case of its size.

This is a classic example of how planning ahead and in particular how you are going to finance the restructuring of your capital structure is an imperative to a successful reorganization. CIT has been working on this specific issue for months.

CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in debt outstanding, said people familiar with the matter. The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured firm. The new debt would mature later than current debt, the impending maturity of which has posed a problem for CIT.

The plan sets up a potential showdown between bondholders with debt coming due soon and those whose debt does not come due for years. If the company doesn’t receive enough bondholder support, it plans to execute the restructuring in bankruptcy court, the people familiar with the situation said.

In a move smoothing its restructuring, the company recently said that it had persuaded billionaire investor Carl Icahn to support its prepackaged bankruptcy plan. Mr. Icahn, who wanted to push CIT into liquidation, failed to persuade other bondholders to derail CIT’s restructuring plan. Please see the link provided to the WSJ article.

One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said. To learn more, read the article by  the Wall Street Journal or read the article posted on the New York Times website.

Tags: Bankruptcy Alternatives, Bankruptcy Courts, Business Reorganization, Chapter 11 Bankruptcy

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