CIT Group Puts Forth 2-Pronged Strategy

Restructuring Plan Employs Threat Of Grim Bankruptcy

NEW YORK, Oct. 1 -- CIT Group, a major lender to small businesses, announced a two-pronged restructuring plan Thursday night aimed at reducing a debt load that has pushed the company to the brink of collapse.

Under the plan, CIT will offer a debt exchange program to its bondholders that, if successful, would allow the company to significantly pare down its $30 billion in debt. At the same time, CIT will solicit approval from the bondholders for a pre-packaged bankruptcy. In the latter scenario, much of a $2.3 billion government investment in the company made through the Troubled Assets Relief Program would be wiped out.

The dual approach, experts said, puts pressure on bondholders to accept an out-of-court restructuring over a painful bankruptcy filing.

CIT said in a statement Thursday night that it needs to secure the participation of enough bondholders over the next several weeks to reduce its debt load by at least $5.7 billion. The company could otherwise be forced to file one of the largest bankruptcies in U.S. history.

The proposed debt exchange would allow creditors with loans coming due to swap that debt for new loans with later maturity dates. The reissued debt would be backed by CIT assets and preferred shares. The deal would effectively give bondholders control of the restructured firm, according to a source familiar with the matter who was not authorized to speak publicly and spoke on the condition of anonymity.

The debt swap offer will be open until Oct. 29, CIT said.

The threat of a bankruptcy is "the ultimate hammer to try to get [bondholders] to agree to" the debt exchange, said Scott Peltz, managing director of the corporate restructuring group at RSM McGladrey. Peltz and others added that the odds are against the debt exchange, because of the competing interests held by the diverse group of creditors who hold loans of various sizes and maturity dates.

Even if it files for bankruptcy protection, CIT said it envisions a quick reorganization into a better-capitalized firm, albeit one controlled by its creditors. CIT said that neither its bank nor its operating units would be part of the bankruptcy filing, which would allow the company to keep servicing its small-business customers during the proceedings.

"Over the last several months, CIT's management, together with its Board of Directors and outside advisors, has developed a comprehensive plan to position CIT for future success," chief executive Jeffrey M. Peek said in a statement, adding that he thinks either path will allow CIT to reemerge as a well-funded company. "We have the liquidity to serve our small business and middle market clients throughout this process."

CIT, which provides critical short-term financing to manufacturers and retailers, is among a dying breed of lenders that relied on nontraditional sources for funding. Many of those lenders have collapsed over the past two years as a crisis of confidence spread through the credit markets and investors stopped buying repackaged loans from such companies. CIT was big enough to forestall an immediate collapse, but it is weighed down by billions of dollars in long-term debt that it has to pay off.

Amid the depths of the financial crisis in December, the Treasury Department injected CIT with $2.3 billion from TARP. CIT has sought additional help from the federal government, but officials declined to provide further aid after determining that CIT's collapse would not significantly disrupt the economy.

CIT escaped 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.

Staff writer David Cho in Washington contributed to this report.