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Sunday, November 1, 2009

CIT Files Its Bankruptcy Plan


Customers Gird for Snags;

Usually No Chapter 12 for

Banks


CIT Group Inc. filed for

bankruptcy protection Sunday, in a final attempt to restructure and keep the doors open at the century-old

commercial lender.

Now, the lender to nearly a million small and midsize businesses must

maintain its customer base as it tries to rehabilitate under Chapter 11 protection.

Most financial firms sell off assets or liquidate in bankruptcy amid fears that customers will draw down credit lines and spark a run on the bank.

But CIT garnered support from about 90% of voting debt holders for a prepackaged reorganization plan that could allow the lender to speed through Chapter 11 and emerge with a new business model by year's end. Under the plan, bondholders will exchange their debt for new debt that matures later, as well as nearly all the equity in a reorganized CIT.

The bankruptcy stay would eliminate some $10 billion in debt from the lender's balance sheet, the company said. CIT has been weighed down by more than $30 billion in bond debt.

A $2.3 billion taxpayer bailout extended to CIT late last year under the Bush administration is likely to be wiped out in the bankruptcy. Common shareholders would likely be wiped out, too.

The plan is among the first attempts to restructure a financial firm in bankruptcy court and have it emerge relatively intact. The board approved CIT's decision to seek Chapter 11 protection in a meeting Sunday. "The board appreciated that this is a [historic] sort of filing," said a person close to the lender. "It is clearly unprecedented."

[Carl Icahn]

CARL ICAHN

CIT remains confident that it can emerge from Chapter 11 by year-end and transfer to its Utah bank businesses including its vendor-financing unit and factoring operation, which provides cash advances to vendors for their receivables.

CIT's platform transfers must still be approved by federal regulators, who must also lift a "cease and desist" order from the lender's bank that crimps its ability to raise deposits. People close to the matter said CIT has received positive signals about getting such approvals from regulators, though no deal had yet been reached

CIT's holding company filed in New York, listing assets about $71 billion and nearly $65 billion in liabilities. While among the largest filings by a U.S. company -- trailing only the likes of Lehman Brothers Holdings Inc., Washington Mutual Inc. and General Motors Corp. -- CIT's core businesses will continue to operate outside Chapter 11 protection. Its bank, with about $10 billion in assets, also isn't part of the filing.

In conversations with customers, CIT has been trying to liken its bankruptcy to a short, nondisruptive hospital stay. "We have to go into court," but "most of the hard work has been completed," said one of the people close to the lender.

CIT has a new $4.5 billion loan to keep it operating through Chapter 11, though some of that money will go to service debt.

"We're going to stay with them," said Haresh Tharani, chief executive of Tharanco Group, whose apparel arm makes clothing for retailers including Saks Inc., J.C. Penney Co. and golf shops. Tharanco gets cash advances from CIT for its receivables.

Mr. Tharani said he believes CIT's bankruptcy-court stay will be a short but necessary fix. He said CIT has been transparent with him about its plans, though he acknowledged minor concerns about a bankruptcy's unexpected twists and turns. "This process needs to happen quickly so there is a lot more clarity" for small businesses, Mr. Tharani said.

Roy Calcagne, chief executive of Craftmaster Furniture, said CIT's financial troubles prompted him to recently renegotiate a contract to make sure the lender couldn't lay claim to his receivables. Craftmaster, a midsize upholstery company in Taylorsville, N.C., and a unit of China-based Samson Holding Ltd., uses CIT to insure and collect its receivables, but doesn't borrow against them like many companies. That relationship keeps him from having to hire workers to collect money.

Mr. Calcagne predicted tougher times for a handful of his vendors, mainly fabric and foam manufacturers, that rely on CIT for cash advances on their receivables. "It's not only the manufacturer that would be in trouble if they lose their funding, but the whole supply chain up to the retail level could be in trouble," Mr. Calcagne said.

Rosenthal & Rosenthal, one of CIT's competitors in factoring, has picked up some of the lender's clients "and they're still coming," said Michael Stanley, a managing director at the firm. "In factoring...there are generally year-to-year agreements. As a lot of these termination dates have come up, people have migrated to other institutions."

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