on October 1, 2009 by in Uncategorized, Comments (0)

CIT eyes debt exchange or prepack bankruptcy: sources

NEW YORK (Reuters) – CIT Group Inc plans to offer its unsecured debtholders two options: either exchange their debt voluntarily or face a pre-packaged bankruptcy, sources close to the situation said on Wednesday.

The debt exchange would allow the finance company’s bondholders to swap their securities for new debt or equity, said the sources, who declined to be identified because the plan is not public.

Shares of CIT fell 40 percent Wednesday on fears that however the company rights itself, be it with a debt exchange or bankruptcy, equity holders will get little. The company’s debt prices fell, too, and the cost of protecting its debt against default rose.

CIT has about $32 billion of unsecured debt on its balance sheet, and hopes to reduce its debt and put off repaying some obligations that are coming due soon, the sources said.

Late on Tuesday, another source told Reuters that the plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured company.

Because exchange offers can be hard, CIT also plans to seek votes to restructure in a pre-packaged bankruptcy, the sources said on Wednesday.

A pre-packaged bankruptcy could be done in 30 to 60 days, the sources said. Such bankruptcies typically require the approval of about two-thirds of debtholders; debt exchanges often require 90 percent of holders to participate.

Any asset sales would be considered only after this restructuring, the sources said.

Few financial companies have survived bankruptcy, but CIT believes its customers will continue to borrow from it even if it is reorganizing in bankruptcy court, the sources said.

CIT still hopes to move toward a bank-centered model, and is in talks with regulators, sources said.

CIT’s board has yet to sign off on the plan, but the board is briefed frequently and knows what management has been working on, the sources said.

Although CIT received $2.3 billion in December under the Troubled Asset Relief Program (TARP), federal regulators this year declined further requests by CIT for funds. Regulators have also said the company’s bank unit cannot collect new deposits.

In July, CIT bought some time to restructure with the help of an emergency loan from a group of bondholders. Bond giant PIMCO, Centerbridge Partners LP, Oaktree Capital Management, Baupost Group, Capital Research & Management Co and Silver Point Capital were part of a group that provided a $3 billion loan.

Under the terms of that loan, CIT must come up with a restructuring plan agreeable to lenders by October 1. That plan will likely include debt exchange offers, the company said in a regulatory filing in August.

“I could also see a scenario in which the company completes a debt exchange and essentially sells off its assets over time,” said Brian Charles, debt analyst at fixed income broker-dealer R.W. Pressprich & Co.

“The long-term outlook for the company, I guess that is still cloudy because I am not sure to what extent would they be able to shift everything over to their bank subsidiary,” Charles said.

CIT’s notes maturing next year with a 4.75 percent coupon fell 2.5 cents on the dollar to 69 cents, according to MarketAxess data.

Debt protection costs for CIT rose on concerns about the company’s restructuring. CIT’s five-year credit default swaps rose to an upfront payment of 36.2 percent of the sum insured plus 500 basis points a year, up from 34 percent, according to CMA DataVision. That means it would cost $3.62 million to insure $10 million of debt plus $500,000 a year.

CIT shares fell 88 cents to $1.32 in afternoon trading.

(Reporting by Paritosh Bansal, Walden Siew and Dan Wilchins; Editing by John Wallace)