CIT Group Plans to Hand Control to Bondholders

CIT Group’s fate is once again hanging in the balance – an already recurring theme it seems, which has become too familiar – if not the norm, for the struggling commercial lender.

Citing a person familiar with the matter, The Wall Street Journal said that the New York-based co. late Tuesday was preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in debt outstanding.

According to the new plan, the company would offer bondholders new debt — which would mature later than current debt — secured by CIT assets, as well as nearly all of the equity in a restructured firm. In other words, CIT Group (NYSE:CIT) is preparing to hand the lender over to its bondholders. If not enough bondholders agreed to the plan, notes the Journal, the company could seek to restructure in bankruptcy court.

While nothing is yet definitive, since the plan is still being developed by a steering committee of bondholders in consultation with CIT management, many of those involved with the exchange offer believe that the company will not be able to avoid seeking Chapter 11, given competing bondholder interests. If that turns out to be the case, CIT’s filing would be one of the largest Chapter 11 bankruptcy-court filings in U.S. history.

What’s more unfortunate in this whole development is that under either the scenario of a bond exchange or a bankruptcy filing, the CIT shares would lose all or most of their value. In addition, the $2.3 billion taxpayer investment in CIT via TARP, will likely be wiped out under the possible restructuring plan.

The lender to small and medium-sized businesses, serving as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, as well as to commercial real estate borrowers, has until Oct. 1 to present its new plan to lenders, the Journal said.

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