CIT Group on Brink Of Collapse -- Again
Debt Swap Could Avert Bankruptcy

By Tomoeh Murakami Tse and David Cho
Washington Post Staff Writers
Thursday, October 1, 2009

NEW YORK, Sept. 30 -- The future of CIT Group, one of the nation's largest lenders to small businesses, was in doubt Wednesday as the firm sought a deal with bondholders that would help it avert a collapse and preserve the federal government's $2.3 billion stake in the company, sources familiar with the talks said.

Federal regulators were being apprised of CIT's fate as the New York company worked Wednesday to meet a deadline to present creditors with a restructuring plan by the end of the day Thursday, a person with knowledge of the situation said. If CIT wins over enough bondholders, the restructuring deal would reduce the company's $30 billion debt load by about 30 percent. Under the plan, bondholders would swap out loans coming due with new debt with later maturity dates secured by the firm's assets. The deal would also give bondholders a vast majority of CIT's equity.

But if bondholders reject the plan, sources said, the company could be forced to file what would be the fifth-largest bankruptcy in U.S. history, behind those of Lehman Brothers, Washington Mutual, WorldCom and General Motors. In this case, much of the taxpayer investment in CIT would be lost.

The ripple effects of a CIT bankruptcy filing could be felt throughout the economy. CIT, with an estimated $75 billion in assets, provides critical short-term financing that helps manufacturers make and deliver goods to shops and retail chains before they receive payment for the merchandise. CIT provides loans to about 1 million companies, including many already struggling in the economic downturn.

Retail trade groups said the failure of CIT could rip a hole in the industry supply chain.

"It's very much up in the air. The uncertainty is what's not good for the retail industry," said Mallory Duncan, general counsel for the National Retail Federation. He noted that the impact would likely not be felt until after the holiday season, as much of retailers' inventory has already been delivered.

It remained unclear if the CIT debt exchange plan would receive enough support. Bondholders often have competing interests, with loans of varying sizes and maturity dates.

On Wednesday afternoon, CIT was finalizing the details of the exchange offer, while at the same time preparing to survey the bondholders on a separate plan for bankruptcy, according to the person with knowledge of the situation. The board of directors had not yet voted to approve a course of action.

The situation remained fluid, people involved in the matter warned, and it was possible that the company and bondholders could reach an agreement to extend the deadline.

It might take a while before the fate of CIT is known. The debt exchange program, which might be announced Thursday, would likely be open for about 20 business days. If not enough bondholders had signed on by the end of that period, Chapter 11 bankruptcy might be the only option left for the company.

In addition to the debt exchange deal, CIT was also in talks Wednesday with Barclays Capital and Citigroup about possible financial assistance, according to a person briefed on the situation.

CIT has been in a precarious financial situation for months. The Treasury Department late last year injected CIT with $2.3 billion under the Troubled Assets Relief Program after the company was granted expedited approval from the Federal Reserve to become a bank holding company. CIT has posted billions of dollars in losses since, and has sought additional help from the federal government.

But as the crisis abated, government officials have grown more concerned about whether they were throwing good money after bad. In July, when CIT was previously on the brink of bankruptcy, the Federal Deposit Insurance Corp. denied the company's application to gain access to a program that guarantees bank loans. The Treasury also considered a second round of aid for the firm at that time, but ultimately determined that CIT's failure would not significantly disrupt the economy.

CIT came back from the brink of failure in July when some of its largest bondholders, including Oaktree Capital, Silver Point Capital and Pimco, gave it a $3 billion emergency loan. The bridge loan bought the company time to set up the bond exchange.

Cho reported from Washington. Staff writer Ylan Q. Mui in Washington contributed to this report.

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