CIT Group (CIT) filed for bankruptcy protection Sunday with broad support from its debtholders, but taxpayers will lose the $2.3B invested in CIT, marking the first definitive loss in the government’s rescue of the financial system.
Nearly 90% of CIT’s bondholders voted in favor of the prepackaged bankruptcy, which CIT says will enable it to reduce total debt by $10B, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability. Bondholders will receive about $0.70 on the dollar, a number that could have fallen as low as $0.06 had CIT entered a freefall bankruptcy. With $71B in assets and $65B in liabilities, CIT’s bankruptcy ranks among the largest in corporate history.
CIT, which is not related to Citigroup, is a commercial and consumer finance company that received $2.3 billion from the TARP program. Now the CIT is filing for bankruptcy, common and preferred stock will get wiped out. However, bondholders will get a return of $0.70 on the dollar. In other words, taxpayers foot the bill.
Spend Matters analyzes what CIT’s bankruptcy means for the retail supply chain:
Kurt Cavano, Chairman and CEO of TradeCard and an expert in the area of global retail trade, stated this morning that CIT provided financing lifeblood for an important portion of the retail supply chain. While many exporters and importers — not to mention actual retailers, who are not always direct importers — pay a reasonable APR if their credit rating is strong (e.g., LIBOR + 200 basis points), Kurt suggests, for companies with less than perfect credit, trade financing costs can easily reach a 10-12% APR. I’ve personally seen actual APRs hit over 20% based on some research I’ve done in the apparel supply chain in the case of global suppliers who accepted early payment discounts.
According to Kurt, “CIT made a great living working the edge of the bad credit companies with high rates and keeping the risk down. This worked well until everything cracked. Then the 8-10% they were charging was not enough when defaults rocketed. Combine this with the fact that the management team was levering up the returns by investing in exotic instruments on Wall Street (e.g., CDOs) and it created a perfect storm.” However, it was not always this way. Kurt notes that, “CIT had always done a great job of profiting and working with those firms on the edge of bad credit.” But going forward, the question remains whether this group will be able to find the liquidity they need to run their businesses if CIT does not come back out with the same type of credit capacity. This is critical because as Kurt suggests, “a huge portion of the retail sector runs on very thin margins” and “use the credit of companies like CIT to run their businesses”.
The Atlantic Wire has a nice summation of who wins and loses as a result of the CIT bankruptcy. Losers, as mentioned above, include retailers and the US taxpayer. Winners: Carl Icahn, CIT itself, and (surprise!) Goldman Sachs.