FT: CIT creditors back protection plan

CIT creditors back protection plan

By Henny Sender in New York
Financial Times
Published: October 30 2009 23:27

Creditors of CIT voted overwhelming to support a prepackaged
bankruptcy protection filing, ending months of uncertainty for the
troubled US commercial lender, as activist investor Carl Icahn threw
his support behind the filing at the last moment.

The filing could come as early as Sunday and affects only the holding
company and one finance unit.

The pre-packaged plan means passage through the bankruptcy court is
expected to be swift and smooth with the company emerging as soon as
the end of the year.

Creditors say they plan to install a new management team soon, though,
from the perspective of CIT's borrowers, CIT's new status will not
make any difference.

The outcome of the vote represents at least a partial defeat for Mr
Icahn, who had sought to derail the plan.

Although the company obtained a $1bn line of credit from Mr Icahn in
return for his support for the plan, it is unlikely that CIT will
actually need to draw down the funds, people familiar with the matter
said.

"It is a way to give him face, throw him a bone and get insurance for
CIT," one leading creditor said. A call to Mr Icahn's office was not
returned.

Operating units of CIT received $3bn in rescue finance from a small
group of investors at the end of July and a $4.5bn secured financing
facility more recently from a much broader group of the company's
creditors.

Both financings and a $3bn line of credit from Goldman Sachs obtained
in June of 2008 - since reduced to $2.12bn - were far more expensive
than CIT's borrowing cost before the financial meltdown.

CIT's troubles began when the market for wholesale funding dried up
last year.

Without a stable source of capital such as deposits, CIT had to pay up
for funds.

That meant the gap between the cost of its own money and the rate it
could charge its borrowers came under pressure.

Many financial firms that once had investment-grade credit ratings
have found it a challenge to make the adjustment to below investment
grade status, especially as financing became scarce.

CIT's filing represents a slight embarrassment for the government,
which gave the lender to small and medium enterprises bank holding
company status and said the company was adequately capitalised less
than a year ago.

However, the government declined to offer financial support to CIT in
contrast to its treatment of other companies that became bank holding
companies such as GMAC.

Now GMAC is seeking a third infusion of funds.

http://www.ft.com/cms/s/0/b58bf4ca-c5a9-11de-9b3b-00144feab49a.html