Advisers to large bondholders of CIT Group Inc. are pushing to allow the company to restructure its debt with a prepackaged bankruptcy option should later debt exchanges fail to attract enough creditors, a source close to the negotiations said on Thursday.
The prepackaged option would explicitly open the door for CIT to file for bankruptcy protection if not enough bondholders tendered their notes, said the source, who declined to be named as discussions were private.
The lender to 1 million small and middle-size companies clinched $3 billion in emergency financing from large bondholders this week to restructure its debt and avoid bankruptcy, after the collapse of rescue talks with the U.S. government.
CIT said estimated funding needs for the year ending June 30, 2010, include $7 billion of unsecured debt. The firm has about $40 billion of long-term debt, according to independent research firm CreditSights.
In a first step, CIT is offering 82.5 cents on the dollar for $1 billion floating-rate senior notes due August 17, but the company said it could be forced to file for bankruptcy if it did not get the support of a large number of bondholders.
"There are enough incentives for bondholders with notes coming due in August to tender because I would think they would prefer to keep it (CIT) out of bankruptcy," said Michael Taiano, an analyst at Sandler O'Neill.
Problems at CIT stem in part from Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans.
Concerns about the company's financial health increased even after CIT in December received $2.33 billion from the government's Troubled Asset Relief Program. The New York-based lender estimated it has lost more than $1.5 billion in the second quarter, hurt by bad loans and writedowns.
The company has been denied access to a U.S. Federal Deposit Insurance Corp program to sell government-backed debt, and the U.S. government declined further assistance, forcing the company to turn to private investors for critical cash.
"Probably major bondholders ... are trying to get a consensus and put a positive stance (on the company's outlook) — making sure we all get this debt exchange done and then we can go on to next phase," said William Larkin, portfolio manager with Cabot Money Management in Salem, Massachusetts.
But he said some investors were panicking. "In the credit crisis we saw this, that the short end blew up. Individuals hope they will get paid off before there is any trouble, but CIT is an example of what may not happen — that you may get in trouble."
CIT's debt weakened. The company's floating-rate notes due in August slipped to 79.38 cents on the dollar in early afternoon trade from 80.25 cents on the dollar early on Thursday morning, according to MarketAxess data, trading below the company's offer price.
CIT's shares fell 16 percent to 73 cents in afternoon trading on the New York Stock Exchange.
A bankruptcy would make CIT, with $75.7 billion of reported assets, the largest U.S. financial company to file since Lehman Brothers Holdings Inc. last September.
