CIT Races Through Chapter 11

It’s a relatively new trend in bankruptcy: Cases speed through court in a matter of days rather than the months it used to take, a deal is truck with creditors, and the company emerges to fight another day.

The latest example is CIT Group, one of the largest lenders to small and medium-sized companies. The company filed for Chapter 11 bankruptcy on November 1, and it's emerging from court protection Thursday.

The company was relieved of about $10.5 billion in debt, according to an estimate in the New York Times. All of the previous shareholders were wiped out, including the U.S. taxpayer. The federal government had given CIT a $2.3 billion infusion of capital last fall and received preferred stock in return. That is now worthless.

The financial restructuring of CIT is a debt-for-equity exchange deal that gives CIT’s creditors all of the new stock in the company, which will be valued at $5.4 billion. An estimated 70 percent of CIT's new equity is going to a group of bondholders who were owed about $25 billion.

The market’s approval of the restructuring was evident at the start of trading Thursday, when CIT’s stock rose by more than 9 percent.

The bankruptcy filing was unusual for a financial service company, which makes money by borrowing at low interest rates and lending the money out at higher rates. CIT got into trouble when it strayed from its bread-and-butter financing of small companies to subprime real estate and student loans. That reckless lending will now presumably come to an end.

Not only is CIT now working under a lighter debt load, but its lenders have deferred the date of maturities by three years. That should give the company time to write down nonperforming loans caused by the recent recession and return to profitability.

CIT said it was also looking for a new top executive after CEO Jeffrey M. Peek announced his intention to step down by the end of the year. There will also be a new board of directors including representatives of the creditors.

The relative speed in resolving the case involves a so-called prepackaged bankruptcy, which has been gaining favor in the U.S. in recent years. Creditors agree out of court to a settlement in hopes of avoiding months or even years of costly litigation and instead reach unanimous consent on a refinancing deal. Think GM and Chrysler.

“I commend the parties for having been able to reach this agreement,” Judge Allan Gropper told the bankruptcy court in Manhattan, according to the Wall Street Journal. “It would not do the debtors any good to remain in Chapter 11 any longer than they need to.”

CIT became a bank holding company last December when it received its injection of capital from Washington. Before the bankruptcy filing, it had attempted to raise new capital by accessing plans the government made available to other banks in distress, namely by issuing debt backed by the Federal Deposit Insurance Corporation. But the government, fearing that it would not be repaid, rejected the request.

CIT then tried to raise funds from private banks, including JPMorgan Chase, but was turned down at the last minute, forcing it to seek protection under Chapter 11.