TOPICS > Economy

CIT Bankruptcy Produces Winners and Losers

BY Carolyn O'Hara  November 2, 2009 at 4:56 PM EST

CIT headquarters in New York; Spencer Platt/Getty Images

The 101-year-old company, with $71 billion in assets, will be restructured less than a year after the government extended it a $2.3 billion bailout, an investment that will now be lost. But if U.S. taxpayers prove to be a major loser in the deal, there are also a handful of winners.

Winners:

CIT’s creditors | In July, CIT’s bondholders, led by a handful of hedge funds, extended the embattled lender a $3 billion lifeline after the government refused an additional bailout. The funds were not enough to stave off bankruptcy, and nor was an additional emergency loan of $4.5 billion last week. But these bondholders will likely receive 70 cents on the dollar for their investments in the arrangement filed Sunday, along with common stock, and they’ll emerge as the likely new owners of a restructured CIT.

Small Businesses | The thousands of small and midsize businesses across the United States that rely on CIT financing to keep their shelves stocked with merchandise aren’t so much winning as dodging an immediate bullet. Many retailers have been panicked that a total CIT collapse could cut off the capital they need to keep merchandise supplies flowing. But under the bankruptcy plan, small business customers will still have access to CIT credit even as the company heads into court. With that bullet dodged, customers may still find it necessary to look elsewhere for credit if the proceedings hit a snag, a tall order in a tight credit market.

Goldman Sachs | Just a few months before CIT was bailed out by the U.S. government last year, Goldman Sachs extended the company a $3 billion loan. Attached to the deal was an agreement that if CIT failed, Goldman would receive a $1 billion lump-sum interest payment. Under the bankruptcy plan, CIT has cut a deal with Goldman to lower the loan amount and pay Goldman a $285 million penalty, along with $250 million in posted collateral. If the bankruptcy proceedings fail, Goldman will reportedly receive the remainder of the $1 billion. Goldman, in other words, got something for its investment even as CIT went south. U.S. taxpayers aren’t so lucky.

Losers:

U.S. taxpayers | Late last year, the Treasury injected $2.3 billion in TARP funds to help stabilize CIT. But when CIT sought additional funds in July, the government refused, arguing that the company was both too troubled to justify additional funds and that the company was not large enough to pose a systemic threat to the economy. With Sunday’s bankruptcy filing, taxpayers’ investment will be wiped out — the first time that the government will have posted a loss on one of its bailouts.

CIT stockholders | CIT’s shareholders will likely be left with next to nothing in the bankruptcy plan, as all common and preferred stock will be canceled. Share values are down 83 percent since last December, but as late as last week, shares were trading for more than $1 apiece on the New York Stock Exchange on the belief a date in bankruptcy court might be avoidable. Those shares are largely worthless today.