CIT Group (CIT), which lost $3 billion in the last eight quarters, is expected to announce a $1.5 billion loss for the second quarter today. Few expect CIT to be able to avoid bankruptcy.
Advisors to CIT bondholders, who recently bailed out CIT with a $3 billion loan, think creditors should push CIT into Chapter 11 bankruptcy after an August debt swap, according to a report from Bloomberg. Advisors recommend that CIT restructure its debt in a "pre-packaged bankruptcy," even if the debt swap is successful." A prepackaged bankruptcy shows the world they have a solution to their problems," Martin Bienenstock of Dewey & LeBoeuf told Bloomberg. "An open-ended bankruptcy creates uncertainty as to whether the company will survive or will liquidate."
CIT reported earlier this week that it does not have enough liquidity to repay the $1 billion of floating-rate notes maturing August 17 and has asked holders of the August notes to swap their claims for 82.5 cents on the dollar. Upon completion of the offer, Fitch indicated that it would downgrade CIT's long-term issuer default rating to "RD" from "C." Fitch considers the purchase a coercive debt exchange.
CIT hasn't had access to the corporate bond market in more than a year and it was denied access to the FDIC's program to issue government-back securities. CIT converted to a bank in December 2008 to get $2.3 billion in funds from the U.S., but was denied a second bailout last week. After that denial, private investors came up with a $3 billion bailout to keep the company afloat, but CIT was told it must get creditors to approve a restructuring plan by October 1.
If CIT files for bankruptcy, more than 700 manufacturing firms and thousands of retailers will lose access to their credit lines, according to an internal report from CIT. In anticipation of possible problems, companies have been drawing down on their existing lines of credit with CIT, creating even greater liquidity problems for the company.
At this point, it appears that bankruptcy is a given for CIT. The only remaining question is when. This 101-year-old company has a broken business model and has not been able to come up with a plan to fix it. Bondholders won't wait much longer and the government has already refused to offer a bailout.
CIT clients won't be left stranded if CIT does go into bankruptcy. Rosenthal & Rosenthal, the largest privately held U.S. factoring company, and Sterling Bancorp will likely pick up the slack. In factoring, manufacturers turn their accounts receivable over to firms like Rosenthal and Sterling. The manufacturing company usually receives about 80 percent of the value in cash. The factoring firm then collects the full amount due from the retailer and it keeps a percentage of the proceeds as compensation for its efforts.
Lita Epstein has written more than 25 books including Trading for Dummies.