CIT may find bankruptcy easier than rebirth

Robert Cyran and Rob Cox

After a difficult landing, CIT slid into a well-foamed runway on Sunday. It fought hard to have its pre-packaged bankruptcy plan approved by creditors, including dissident bondholder Carl Icahn. But the more difficult task lies ahead for the US lender to small and medium-sized businesses: convincing the world it has a reason to exist beyond Chapter 11.

True, the firm did succeed mightily in convincing its creditors to back management's plan for a somewhat orderly restructuring. About 90 percent of them supported the measure. This is surprising given estimates by some analysts that creditors could receive up to 90 cents on the dollar in a wind-down.

It appears lenders feared there was too much risk in liquidation, including accelerated customer flight and counter-parties seizing assets. CIT may also have successfully scared unsecured lenders into believing they might only receive six cents on the dollar.

Indeed, such a rousing success for CIT management's preferred route raises questions of why the company went to such lengths to placate Icahn, accepting $1bn of contingent financing from him. Paying the associated fees looks like an expensive way to avoid embarrassing attention and lawsuits from the activist. The pre-packaged bankruptcy would have succeeded without the support of Icahn, according to people familiar with the vote.

But now that it has gotten its deal through comes the harder part of proving the viability of the business. That looks a Herculean task. Above all, the CIT brand is now synonymous with bankruptcy - not something that usually attracts businesses seeking capital.

And even if clients seek CIT's custom when it emerges from bankruptcy, it is hard to see how it can resume funding itself with a clearly broken business model. The financing infrastructure that allowed CIT to borrow money cheaply in the commercial paper markets and lend it out to needier borrowers on a longer-term basis looks to be permanently shuttered.

Even CIT's mightier non-bank rival GE Capital is struggling to adapt to this new world order. And unlike CIT, GE has been able to avail itself plentifully from government financing guarantees and a deep-pocketed parent. CIT has accomplished a tricky navigation into prepackaged bankruptcy. Convincing customers and lenders it needs to exist beyond that point is not a given.

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