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CIT finalises debt exchange plan
By Henny Sender and Saskia Scholtes in New York
Published: September 30 2009 23:04 | Last updated: September 30 2009 23:04
CIT Group, the US commercial lender, was on Wednesday finalising a last-ditch attempt to avoid a bankruptcy filing with a restructuring plan that would offer bondholders a “take-it-or-leave-it” debt exchange.
The company would apply for pre-packaged Chapter 11 bankruptcy ­protection – and default on $800m in debt due in November – unless bondholders agreed to specific concessions, according to a proposal being readied by advisers to CIT’s largest creditors.
Peek gets more time at CIT - Sep-05
CIT gains breathing space to restructure debt - Aug-17
CIT gives New York Fed oversight of restructuring - Aug-13
Scramble to avoid default delays CIT results - Aug-11
CIT sweetens offer on $1bn debt - Aug-04
CIT to provide $1bn to trade finance unit - Aug-01
The plan would ask bondholders to agree to an exchange offer that would reduce the company’s $30bn of gross debt by between 30 per cent and 40 per cent. If CIT fails to win the necessary votes for the plan, the company would automatically switch to the bankruptcy option, under which bondholder losses would probably be far larger.
Exchange offers usually consist of a combination of carrot and stick but analysts say this plan has a particularly big stick.
“It is an innovative, total solution,” said one large creditor. “It is also an either-or situation. The offer can’t be amended and there can’t be any side deals.”
As the market began to focus on the implications of the exchange offer, the price of debt due in November sank to 80 cents on the dollar on Wednesday, down from 87 cents on Tuesday. The proposal gives creditors ­virtually all the equity in the ailing CIT and requires a bigger cut in the price of the debt, especially for longer-dated paper, than many creditors expected.
The structure of the exchange offer borrows heavily from game theory in an effort to compel creditors to go along with the offer. Holders of short-dated debt will get about 90 cents on the dollar, if enough sign on. But if the critical level of support is not secured, they will probably be looking at recoveries of no more than 70 cents on the dollar in bankruptcy. The plan is also structured to discourage lenders from using a common tactic in exchange offers – hoping their peers would support the offer and then pay remaining holdouts 100 cents on the dollar to go away.
Both the debt exchange offer and the prepackaged bankruptcy would aim to provide a comprehensive restructuring of CIT’s balance sheet. The company then hopes to win regulatory approval to transfer business lines from the parent to the bank holding company, and then try to attract deposits to fund the business.
CIT ran aground when its funding model of borrowing cheaply in the short-term wholesale markets broke down. The company secured $3bn of rescue finance from a group of bondholders in the summer but this is more expensive than the money it charges its own borrowers. The terms of that finance require the company to file a restructuring plan by Thursday.
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