CIT Bankruptcy Filing Expected in Days; $2.3 Billion Taxpayer Money to Be Wiped Out; Goldman Sachs Receives $285 Million In Termination Fees

Update:

– CIT Approaches Bankruptcy After Striking Icahn, Goldman Accord (Bloomberg):

Oct. 31 (Bloomberg) — CIT Group Inc., the 101-year-old commercial lender seeking to avoid collapse, may file for a prepackaged bankruptcy as soon as this weekend after striking deals with billionaire Carl Icahn and Goldman Sachs Group Inc.

A prepackaged bankruptcy “is probably going to go through,” Icahn said yesterday. He will supply a $1 billion loan for “supplemental liquidity” that can be used as bankruptcy financing, the New York-based company said. CIT also said it reached an agreement with Goldman Sachs to keep a credit line open should the lender file for court protection.
…
CIT’s agreement with New York-based Goldman Sachs will reduce a $3 billion credit facility to $2.13 billion and keep the line open should CIT file for bankruptcy.

Goldman Sachs Agreement

In exchange, Goldman Sachs received $285 million in termination fees, CIT said yesterday in a filing with the U.S. Securities and Exchange Commission. Under the terms of the two companies’ original agreement, Goldman Sachs would have been due a $1 billion termination payment to close the credit line after a CIT bankruptcy.

——————

Before Goldman Sachs would have received a $1bn ‘windfall’ if CIT fails:

– Goldman Sachs to be paid $1bn if CIT fails, while US taxpayers would lose $2.3bn (Financial Times)

Goldman Sachs stands to receive a payment of $1bn – while US taxpayers would lose $2.3bn – if embattled commercial lender CIT files for Chapter 11 bankruptcy protection, people familiar with the matter said.
…
The agreement with Goldman states that if CIT defaults or goes bankrupt, it “would be required to pay a make-whole amount” that totals $1bn, the people familiar with the matter said.
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Goldman said: “This would not be a windfall payment. The make-whole payment is simply the present value of the spread to be earned over the life of the facility.”

The US taxpayer loses $2.3 billion, Goldman Sachs gains ~~$1 billion~~ $285 million.

I told you before that the real crisis has only just begun. This is the ‘Greatest Depression.’

CIT’s Swoon Hits Taxpayers

CIT would be the fifth-largest bankruptcy filing in U.S. history

The $2.3 billion in taxpayer money spent to save CIT Group Inc. is likely to be wiped out, as the lender prepares to file for bankruptcy protection in a high-stakes restructuring plan aimed at keeping the firm in business.

People familiar with the plan said CIT, a major lender to small businesses, intends to file for bankruptcy-court protection in New York within days, perhaps as early as Sunday or Monday. Financial firms such as CIT have historically been sold off or wound down after a Chapter 11 filing, for fear that customers will draw down lending lines and cause a run on the bank. But CIT expects to have enough creditor support to complete a prepackaged reorganization by year-end, a relatively short period for a bankruptcy case of its size.

In a move smoothing its restructuring, the company said Friday that it had persuaded billionaire investor Carl Icahn to support its prepackaged bankruptcy plan. Mr. Icahn, who wanted to push CIT into liquidation, failed to persuade other bondholders to derail CIT’s restructuring plan.

With $71 billion in assets, CIT would have the fifth-largest bankruptcy filing in U.S. history, trailing only those of Lehman Brothers Holdings Inc., Washington Mutual Inc., Worldcom Inc. and General Motors Corp. CIT’s Utah bank, which has about $10 billion in assets, wouldn’t be part of the bankruptcy filing.

Carl Icahn

One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said.

Starting last year the Treasury invested upward of $400 billion in a variety of companies, from auto makers to insurers, to shore up their finances. A number of those companies, such as Goldman Sachs Group Inc. and Morgan Stanley Inc., have repaid the bailout money. A bankruptcy of CIT would be the first time the government recorded a loss on one of its bailout investments.

Taxpayers could have lost more, though. Despite likely losing its $2.3 billion investment, the U.S. government saved possibly billions more in losses when it rebuffed further bailout requests over the summer, after concluding CIT’s demise wouldn’t threaten the broad financial system.

A filing could also be a blow to some of the tens of thousands of small- to medium-size businesses that are customers of the century-old lender. Unlike public corporations — which enjoy access to reinvigorated credit markets — small borrowers are finding capital remains scarce.

Even if CIT emerges intact, its lending capacity could drop to less than 20% of what it was two years ago, according to an estimate by Brian Charles, a debt analyst at R.W. Pressprich & Co. CIT made just under $40 billion in new commercial loans in 2007, not including an additional $45 billion for trade financing, according to company figures. That plunged to just $4.4 billion in the first half of 2009.

CIT’s bankruptcy filing “is a risky proposition,” said Donald Workman, head of the bankruptcy practice at law firm Baker Hostetler. “It’s far from a certainty that they will be able to exit… because of all the challenges a financial services company will face, particularly in this market.”

Other restructuring experts said CIT’s plan puts it in good position to speed through court. “If you have a deal pre-negotiated, you have creditors locked up and you put out the right message … companies can actually get fixed through bankruptcy and not lose their customers,” said Jonathan Henes of Kirkland & Ellis LLP.

Under the bankruptcy plan, senior bondholders would trade their current debt for new debt maturing later worth about 70 cents on the dollar. They would get 92.5% of the equity in a restructured CIT. Junior bondholders would get the remaining equity in a reorganized CIT, but no new debt.

Large bondholders — including investment firms Centerbridge Partners, Silver Point Capital, Capital Research & Management and Oaktree Capital Management — gave CIT rescue loans over the summer to buy it time to restructure. They and other bondholders have committed $4.5 billion more to see it through.

CIT overcame one hurdle Friday, when Mr. Icahn reached an agreement with CIT, pledging to support the lender’s bankruptcy plan and providing $1 billion in backup financing. CIT will tap the funds only if the $4.5 billion loan proves insufficient. “The prepack is giving up control and putting fair restrictions on capital use. That, to me, is a great victory for bondholders,” Mr. Icahn said in an interview.

If CIT emerges from bankruptcy protection, the company still needs the Federal Deposit Insurance Corp. to lift a “cease-and-desist” order limiting its ability to raise deposits at its Utah bank, a key to implementing its new plan. A person familiar with the negotiations said CIT had received “positive” indications that the FDIC would approve all its requests, but cautioned a deal had yet to be reached. An FDIC spokesman declined to comment.

Write to Mike Spector at [email protected] and Kate Haywood at [email protected]

OCTOBER 31, 2009

Source: The Wall Street Journal

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