US lending giant CIT files for bankruptcy protection

Struggling US lender CIT Group filed for bankruptcy protection in an attempt to restructure its debt while trying to keep badly-needed loans flowing to thousands of mid-sized and small businesses.

The company filed in New York bankruptcy court after a debt-exchange offer to bondholders failed.

CIT said in a statement that its bondholders overwhelmingly opted for a prepackaged reorganisation plan which will reduce total debt by $10bn (€6.8bn) while allowing the company to continue to do business.

The bankruptcy protection filing is one of the biggest in US corporate history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors.

CIT’s bankruptcy filing shows £43bn (€29bn) in finance and leasing assets against total debt of £39.3bn (€26.6bn).

A prepackaged bankruptcy, which has the support of major bondholders, speeds up the process of restructuring CIT’s debt and could allow it to exit court protection by the end of the year.

In addition to reducing its debt, CIT said the plan cut cash needs over the next three years, which should help it return to profitability more quickly.

“The decision to proceed with our plan of reorganisation will allow CIT to continue to provide funding to our small business and middle-market customers, two sectors that remain vitally important to the US economy,” said Jeffrey Peek, chairman and chief executive.

Mr Peek has said he plans to step down at the end of the year.

CIT’s move will wipe out current holders of its common and preferred stock. That means the US government will probably lose the £1.4bn (€950,000) it sunk into CIT last year in return for preferred shares to prop up the ailing company.

The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year.

US Treasury Department spokesman Andrew Williams said the government would be closely monitoring the bankruptcy proceedings, but acknowledged that “recovery to preferred and common equity holders will be minimal”.

CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July.

It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.

The company received £2.7bn (€1.8bn) in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a £610m (€413m) line of credit from billionaire investor and bondholder Carl Icahn.

But the company failed to convince bondholders to support a debt-exchange offer, a step that would have trimmed at least £3.5bn (€2.4bn) from its debt burden and given CIT more time to pay off what it owes.

Analysts warned that the bankruptcy could add to the uncertainty around loans for the nation’s small businesses, especially retailers, which make up a significant portion of CIT’s clients and are already struggling with tight credit markets.

CIT is the financier for about 2,000 vendors that supply merchandise to more than 300,000 stores, many of which are gearing up for the critical Christmas shopping season.

They rely on the lender to cover costs ranging from paying for orders to making payroll. Any disruption caused by bankruptcy could wreak havoc on their operations, said Joe Alouf, a partner with Eaglepoint Advisors, a crisis management company partly owned by Kurt Salmon Associates.

“CIT is the 600lb gorilla in the industry,” Mr Alouf said.

But CIT has already pulled back sharply on its lending to businesses as it tried to preserve cash.

According to its most recent quarterly earnings report, the company originated just £2.7bn (€1.8bn) worth of new business during the first six months of this year compared with £6.7bn (€4.5bn) in the first half of 2008.

CIT said the bankruptcy filing was only for the holding company, and would not affect its operating subsidiaries, such as Utah-based CIT Bank.

CIT has filed a number of first-day motions to allow it to continue operations, including requests to keep paying wages and other employee benefits and to pay its vendors and certain other creditors in full.