CIT Offers Debt Exchange, Draws Up Bankruptcy Plans

In what is being viewed as a last-ditch effort to avoid filing for protection from its creditors, commercial lender CIT Group Inc. (NYSE: CIT) is offering bondholders a debt exchange, while still preparing for a likely chapter 11 bankruptcy filing.

CIT in July raised $3 billion from bondholders to keep afloat after it was denied more funds from the U.S. government under the Troubled Asset Relief Program (TARP). The company's bondholder steering committee has already indicated its intention to exchange $10 billion of unsecured debt or vote on a prepackaged bankruptcy plan that CIT believes could be resolved "expeditiously with minimal disruption to its business," the lender said.

If CIT can't eliminate at least $5.7 billion of its more than $30 billion in unsecured debt through the exchanges, the company will seek protection from creditors, it said. The exchange offer is set to expire on Oct. 29.

Analysts were concerned if CIT could get bondholders to agree to the exchange, and if the lender's minimum target for debt elimination is enough.

"We believe CIT may need to reduce its debt burden by approximately $9.3 billion to regain access to the unsecured capital markets," CreditSights Inc. analyst Adam Steer said in an e-mail obtained by Bloomberg News. By targeting $5.7 billion, "we question whether CIT is improving its profile enough," he said.

Those concerns were amplified as CIT bonds that mature within the next few months moved closer in price to longer-dated obligations, a sign that bondholders aren't convinced the lender will be able to restructure outside of bankruptcy as $1.15 billion of debt is due by the end of the year.

"To do what they want to do out of court, they need very high consent levels to eliminate the problem of holdouts," Kevin Starke, an analyst at CRT Capital Group LLC told Bloomberg earlier this week before details of the plan were released.

Under the exchange plan, CIT bondholders of older notes would receive between $700 and $900 of new debt plus between 0.41 and 3.26 of new preferred shares for every $1,000 of existing debt tendered, the lender said in a regulatory filing with the Securities and Exchange Commission (SEC). Holders of the company's newer securities will receive either 2.04 or 4.07 new preferred shares for every $1,000 of notes swapped, and no new debt.

CIT has also sought $4 billion to $6 billion in secured debt for other capital requirements, likely from the steering committee, a person briefed on the matter told The New York Times.

That money could be used for debtor-in-possession financing to sustain the lender through its bankruptcy case, which CIT expects would last 30 to 45 days, people briefed on the matter told The Times.

Six of CIT's largest bondholders, including Pacific Investment Management Company LLC, Oaktree Capital Management L.P., Silver Point Capital and Centerbridge Partners are a part of the steering committee.

CIT said its bank and its operating units would not be a part of the bankruptcy filing, which would technically leave its day-to-day functions unimpeded.

A CIT bankruptcy would be the fifth-largest of its kind by assets in U.S. history, following Lehman Brothers Holdings Inc. (OTC: LEHMQ), Washington Mutual Inc. (OTC: WAMUQ), WorldCom Inc. and General Motors Corp., according to The Wall Street Journal.

News and Related Story Links:

• Money Morning:
  Bondholders to Bail Out CIT
• Money Morning:
  CIT Won't Get Additional Bailout Money; Bankruptcy Likely
• Bloomberg News:
  CIT Bond, Swaps Prices Signal Concern Debt Exchange May Fail
• CIT SEC Filing:
  Offers to Exchange Relating to Any and All of Their Respective Outstanding Notes Listed Below and Solicitation of Acceptances of a Prepackaged Plan of Reorganization
• The New York Times:
  In Restructuring Effort, CIT Offers a Debt Exchange
• The Wall Street Journal:
  CIT Offer Pits Creditors Against Each Other