CIT Group, the New York finance company, said it is planning an exchange offer for some of its unsecured notes in an effort to shore up its liquidity, but if it does not complete the offer the company may file for a Chapter 11 bankruptcy filing.
The plan has CIT Group Inc. and CIT Group Funding Company of Delaware launching exchange offers for certain unsecured notes. The exchange offer expires on Oct. 29. At the same time, CIT is soliciting bondholders and other holders of CIT debt to approve a prepackaged plan of reorganization.
“If the company does not achieve the objectives of the exchange offers, it may decide to initiate a voluntary filing under Chapter 11 of the U.S. Bankruptcy Code,” CIT warned late Thursday.
A source familiar with the situation said a successful exchange offer “is possible, but not likely” so the company likely will petition for court protection. If CIT were to file for court protection, this source says, it would likely put only the holding company into bankruptcy court protection.
While published reports state a debtor-in-possession or DIP loan has been prepped for CIT, the source familiar with the situation says this is not the case. There is a special backup loan facility being readied for CIT, according to the source who added that there were no plans for any asset sales if CIT were to file for bankruptcy protection.
In a filing with the Securities and Exchange Commission, an 8-K, CIT warned that in July it experienced significant adverse developments relating to its funding strategy and liquidity that, taken together with recent losses, raise “substantial doubt” about its ability to continue as a going concern.
Last year, CIT looked to protect itself from the severe decline in liquidity by becoming a bank holding company. In December 2008 it also converted its charter as an industrial loan company to a non-member commercial bank.
CIT completed a tender offer in August; bondholders representing 59.81% of CIT's $1 billion in outstanding floating-rate senior secured notes tendered their securities. The company lowered the minimum threshold required to complete the offer to 58% from 90% to garner enough support to complete the tender offer.
Soon after the tender offer, analysts warned that the future of the company remained precarious.
“We think the completion of this offer is an important step in CIT's restructuring, but it does not mean the company will absolutely avoid bankruptcy,” said Standard & Poor’s. “It likely needs to shed more assets and will probably need to get additional concessions from creditors as it works its way back to profitability.”
When it comes to specifics about the exchange offer CIT said that investors holding existing debt security would receive a pro rata portion of each of five series of newly-issued secured notes, with maturities ranging from four to eight years. They also may get shares of newly issued voting preferred stock.
The exchange offers are conditioned upon achieving acceptable liquidity and leverage. Specifically, the exchange offers cannot be completed if the face amount of the company's total debt is not reduced by at least $5.7 billion in aggregate, with specific debt reduction targets for the periods from 2009 to 2012.
