The FINANCIAL — CIT Group Inc (CIT.N), the lender to hundreds of thousands and small and medium-sized businesses, filed for bankruptcy on November 1, in an effort to cut $10 billion in debt. The lender announced that with the overwhelming support of its debtholders, the Board of Directors voted to proceed with the prepackaged plan of reorganization for CIT Group Inc. and a subsidiary that will restructure the Company’s debt and streamline its capital structure.
The bankruptcy, one of the largest in U.S. corporate history, has been widely expected for months and is unlikely to provide a massive near-term shock to the financial system, Reuters wrote. But CIT's failure could further constrict credit and weigh on the fragile U.S. economy.
"It takes out another source of capital for small businesses, and there are not a lot of companies anxious to make loans available to that group now," said Blake Howells, head of equity research at Becker Capital Management in Portland, Oregon, according to the same source.
After being rescued from almost certain collapse in July following a US government rejection of a bailout plea, the company had struggled to stay afloat, receiving an emergency loan of 4.5 billion dollars as recently as October 28, AFP reported. But when a comprehensive debt-exchange plan failed last month, the board of the company, which ran into financial problems after a home mortgage meltdown plunged the country into its worst crisis in decades, had begun reorganizing its capital structure ahead of a possible bankruptcy.
"With the overwhelming support of its debt-holders, the board of directors voted to proceed with the prepackaged plan of reorganization for CIT Group Inc and a subsidiary that will restructure the company's debt and streamline its capital structure," the company said in a statement after the board met Sunday, according to the same source.
In a statement, the company said it is asking the U.S. Bankruptcy Court for the Southern District of New York for a quick approval of the prepackaged plan, CNN Money informs.
"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 (CIT, Fortune 500) chairman Jeffrey M. Peek, according to the same source.
CIT’s filing means the end of CIT’s efforts to transcend its roots as a sleepy financier of retailers, restaurants and manufacturers, The New York Times reported. Under Peek, the company branched out into student lending and investment advisory services. Befitting its ambitions, it moved from an office park in Livingston, N.J., to a flashy tower in Midtown Manhattan.
But the company was laid low by the turmoil in the credit markets, which sapped its ability to finance its daily operations. Even after receiving the initial $2.3 billion in government aid, it went to its regulators for additional help, only to be told it needed to find a solution in the private markets, according to the same source. It subsequently bargained with its creditors over a restructuring plan that would keep it operating and cut $10 billion in unsecured debt.
CIT's operating subsidiaries, including CIT Bank, are not included in the bankruptcy filing, and expect to continue operating, the company said in a statement, Reuters reported. CIT plans to reduce its total debt by about $10 billion in bankruptcy. As of the middle of this year, it had $71 billion of assets and $64.9 billion of debt.
Under the bankruptcy plan approved by bondholders, creditors will end up owning the company. Most bondholders will also end up with new CIT debt worth about 70 percent of the face value of their old debt. Preferred shareholders, including the U.S. government, will get money only after other creditors are paid back, according to the same source. Current common shareholders will receive nothing.
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