CIT in Last-Ditch Rescue Bid

Lender Readies Plan to Hand Control to Bondholders; Bankruptcy Filing Is an Option By MIKE SPECTOR and JEFFREY MCCRACKEN The fate of CIT Group Inc. was hanging in the balance Tuesday as the large commercial lender readied a plan that would likely hand control of the company to its bondholders. CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in debt outstanding, said people familiar with the matter. The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured firm. The new debt would mature later than current debt, the impending maturity of which has posed a problem for CIT. The plan sets up a showdown between CIT and its lenders. If the company doesn't receive enough bondholder support, it plans to execute the restructuring in bankruptcy court, the people familiar with the situation said. While the plan is being developed by a steering committee of bondholders in consultation with CIT management, many of those involved said they didn't expect that the company could avoid seeking Chapter 11 bankruptcy protection, given competing bondholder interests. If CIT does file, it would be the fifth-largest bankruptcy filing in U.S. history, by assets, trailing only Lehman Brothers Holdings Inc., Washington Mutual Inc., WorldCom Inc. and General Motors Corp. CIT would continue operating under creditor protection, although other financial businesses have struggled to remain viable in bankruptcy. View Full Image Getty Images The CIT Group logo in July. The company prepared a plan that would likely hand control to its bondholders. But if not enough bondholders agree to the plan, the company could seek bankruptcy filing. CIT shares, which are down 50% this year, have swung wildly in recent days as an Oct. 1 restructuring deadline neared. On Tuesday, the stock rose 32% and 360 million shares changed hands after news reports of possible bond sales and merger deals. Under either the scenario of a bond exchange or a bankruptcy filing, the shares would lose all or most of their value. CIT declined to comment. The people familiar with the matter cautioned that talks remained fluid and many details remained to be determined, including the amount of debt CIT needed to extinguish to avoid a bankruptcy filing. CIT's board has yet to approve any course of action, these people said. Yet the plan could end what has been a months-long drama over CIT, a century-old company that is one of the largest lenders to thousands small and medium-size businesses, such as Dunkin Donuts franchises. It has been especially important to certain retail and apparel businesses, but got into trouble by plunging, a few years ago, into student lending and subprime mortgage loans. Although CIT owns a Utah bank, it has relied for much of its funding on the capital markets -- bonds and short-term debt called commercial paper. Having run out of funding options this summer, given its "junk" credit rating, CIT faced the looming need to roll over debt that was maturing. The firm teetered on the verge of a bankruptcy filing before it got a rescue package in late July. CIT had sought relief from federal regulators and last December did receive $2.3 billion under the Treasury's Troubled Asset Relief Program. In 2009, however, federal regulators declined further aid, having determined that a failure by CIT wouldn't severely harm the economy. That left the lender scrambling to right a balance sheet burdened by bad real-estate and commercial loans. CIT avoided a bankruptcy filing in late July when a group of large bondholders such as Pimco, Oaktree Capital and Silver Point Capital infused $3 billion in last-minute financing. The money acted like a "bridge" for CIT to prepare a debt-exchange offer. Troubled companies often float the idea of bond-exchange offers in an effort to avoid a bankruptcy-court filing, hoping to push debtholders to make certain concessions. GM this spring offered bondholders a 10% equity stake in exchange for all but $3 billion of $27 billion in unsecured debt. GM failed to get enough takers and in June filed for bankruptcy protection, from which it has since exited. CIT's initial debt-exchange is expected to last about 20 business days, said people familiar with the matter. One additional element would include new secured borrowing of $3 billion to $4 billion, said the people familiar with the matter. Bank regulators are being kept apprised of the situation, said these people One issue is the $2.3 billion taxpayer investment in CIT via TARP. While the U.S. would recover a small amount in any debt-exchange plan, it is likely that much of the sum would be wiped out, said people familiar with the matter. Earlier this year, whether to give CIT further aid beyond TARP presented a difficult question for the Obama administration. Failure to do so opened it to criticism it was aiding giant banks but not a smaller lender, and one on which many smaller businesses rely for financing. CIT had sought to get in on a program in which the Federal Deposit Insurance Corp. guaranteed lenders' debt. The FDIC ultimately declined CIT's entreaties. Write to Mike Spector at mike.spector@wsj.com and Jeffrey McCracken at jeff.mccracken@wsj.com