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.

This is not a good sign. The Sun Sentinel did not indicate whether the NexStore had filed for protection from creditors, bankruptcy, however this fact pattern is the classic pattern where bankruptcy, should be and is, a very valuable tool to assist the cash strapped business to get some relief.

To learn more about how to protect yourself from creditors and/or bankruptcy, contact me at 561-208-6383 or emailing me at info@sidneyturnerllc.com.

Bankruptcy and financial professionals have speculated that such scenarios where the expected outcome of the application of rules of law could make investors and lenders demand higher interest rates on debt given the uncertainty over how they might fare should the borrower encounter financial difficulties.

The concern is that lenders have factored certain expectations of identifiable events happening having a predictable result based on precedent of rules and laws.

How are investment decisions to be made and quantified when lenders are faced with bankruptcy courts that appear to disregard the rules? Are such arguments for speed a short-term concern that likely will not be followed when the financial crisis ends? Chrysler maintains that it used established bankruptcy procedures, and that extraordinary measures were needed during the unprecedented economic crises.

Lawyers who represent secured creditors fear the Chrysler precedent could be used to allow companies to get around established procedures for reorganizations which require negotiations and creditor vote approving a plan of reorganization.

At issue with Chrysler was a procedure called a “363 sale,” which refers to a section of the U.S. Bankruptcy Code which allows the court to approve a sale assets without the approval of creditors. Such sales are typically used to sell a single or group of asset(s) in bankruptcy proceedings, such as a building that needs to be sold quickly to maximize its value, and can be done without creditor approval. Creditors claim Chrysler used the procedure to effect a restructure of the entire company, not just a single or group of asset(s).

Lawyers are citing these examples in the name of speed, claiming emergency circumstances. The question remains how these impact future attempts at 363 sales will.