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CIT Says Chapter 11 Not Ruled Out

CIT reports $1.5 billion in second-quarter losses.

CIT Group Inc. said losses continued to pile up in the second quarter and warned bankruptcy was still a possibility if bondholders don’t agree to take less than face value for $1 billion in debt coming due next month.

This story first appeared in the July 22, 2009 issue of WWD.  Subscribe Today.


After weeks of searching for a financial lifeline, and some harried 11th-hour negotiations, CIT reached a $2 billion credit agreement with a group of its key bondholders Monday and expects to receive another $1 billion in commitments this month. But the two-and-a-half-year financing package comes at a heavy price, with an interest rate of 10 percent plus the London Interbank Offer Rate.

Now that financing is in place, much depends on the success of CIT’s cash tender offer to buy back roughly $1 billion in bonds coming due Aug. 17 for 82.5 cents on the dollar.

The major bondholders have essentially lent CIT enough money to buy back the bonds they hold — and charged them interest in the process — but it is still not certain that all the bondholders will accept the lower-than-face-value payout.

“If the offer is not successfully completed, the company does not anticipate that it will otherwise be able to make the upcoming Aug. 17, 2009, maturity payment…and may need to seek relief under the U.S. bankruptcy code,” CIT said in a regulatory filing with the Securities and Exchange Commission Tuesday.

That proviso seemed to be enough to spook investors, who pushed CIT’s stock down 21.6 percent to 98 cents Tuesday. The stock dropped to 41 cents last Thursday, when bankruptcy appeared likely, improved to 70 cents last Friday and rose to $1.25 on Monday following word that a deal to keep it afloat had been reached.

The 101-year-old firm is a financial cornerstone of the fashion world, accounting for an estimated 60 percent of the industry’s factoring volume. CIT loaned fashion firms and retailers about $4 billion last year.

Assuming all the pieces of this week’s bailout click into place, the company said it might still need to sell assets to generate working capital and keep up with debt payments. Of its five business units, only two were profitable last year — the factoring unit, with $6 billion in assets and $100 million in net income, and its transportation business, with $14 billion in assets and $327 million in net income. Last week, a spokeswoman for J.P. Morgan Chase declined comment on reports the bank, which doesn’t operate a factoring unit, might be interested in acquiring CIT’s. J.P. Morgan and Goldman, Sachs & Co. were subsequently cited as possible sources of debtor-in-possession financing in the event CIT had to file Chapter 11.

Including the $1 billion in debt due next month, CIT has about $7 billion in unsecured debt coming due during the 12 months ending June 30.

CIT also projected second-quarter losses of more than $1.5 billion, including about $700 million in charges to write down the value of goodwill and intangible assets.

The firm’s clients, generally small and midsized businesses that depend on its financing to keep the lights on, contributed to its liquidity crunch by drawing down their lines of credit in recent weeks. And they could further destabilize the lender.

“If the borrowers on these lines of credit continue to access these lines or increase their rate of borrowing…this could further substantially degrade the company’s liquidity position, which could have a material adverse effect on its business,” CIT said in the filing.