Wednesday, September 30, 2009

CIT On the Brink, Yet Again

Everybody's favorite commercial lender, CIT, was once again teetering on the brink of a bankruptcy filing. The company is preparing a debt exchange offer that would eliminate 30%-40% of its more than $30 billion in debt outstanding. New bondholders would be secured by CIT's assets, as well as nearly all the equity in the restructured firm. If enough bondholders don't fall for this latest effort to keep the firm alive, CIT plans to resolve its issues in court via a Chapter 11 bankruptcy filing. It is always nice to leave your mark in the business history record books, but going down as the fifth-largest bankruptcy filing in US history during Bailout Fest 2008-2009 is perhaps a bit disappointing. Speaking of bailouts, the government, in its far more generous days, did lend CIT $2.3 billion through TARP, most of which it is likely to lose if CIT winds up in Chapter 11.

On one hand, a restructuring is exactly what the debt-laden lender needs and it's good to see nature finally taking its course. On the other, the lender would be forced to shrink itself into a smaller company, which bodes ill for the thousands of small companies that rely on CIT for financing to conduct their daily operations. Where are those companies going to turn? Our nation's banks? They are too busy using their available capital to trade stocks and bonds. They have no excess capacity to lend to pipsqueak borrowers.

The debt exchange is set to last 20 business days. One way or another, we'll have some closure to the "Is CIT going to make it?" situation.

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