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Leading lender CIT files for bankruptcy despite government bailout

Text by FRANCE 24

Latest update : 2009-11-02

The CIT Group, one of the largest small-business lenders in the United States, filed for bankruptcy on Sunday to mark the fifth-largest corporate bankruptcy in the United States and the first firm to do so after receiving government bailout funds.

CIT Group’s bankruptcy filing marks the fifth-largest corporate bankruptcy in the United States and the first for a firm that has received government bailout cash. The group is one of the largest small-business lenders in the country.
CIT received $2.3 billion dollars from the US government last December as part of an emergency rescue package. But despite this help, the company struggled for months to stay afloat after the home mortgage sector dried up as part of a nationwide collapse in lending. As the US fell deeper into recession over the past 18 months, many of its debtors failed to repay their loans, squeezing the company profit margin.
The group, which operates in more than 50 countries, advises and supplies finance solutions, such as short-term liquidity, to almost one million small firms and middle-market companies. It is the largest lender to the US retail sector. 
In its filing at the Manhattan US Bankruptcy Court, CIT reported total assets of $71 billion dollars and liabilities of nearly $65 billion, making its bankruptcy the fifth-largest in US history after Lehman Brothers, Washington Mutual, WorldCom and General Motors.
‘Could not have come at a worse time’
CIT provides “a crucial link in the economy” by acting as a third-party lender, says FRANCE 24’s business editor, Douglas Herbert. By buying payments and invoices from suppliers and manufacturers, CIT would offer quick liquidity while it waited for the retailers to pay up.   
A lot of small, midsize firms “relied heavily on CIT for when they needed immediate cash”, he says. Coming as it does ahead of the Christmas shopping season, Herbert says the CIT bankruptcy “could not have come at a worse time”.
The company board has now approved a plan to unload some $10 billion dollars in debt and hopes to emerge from bankruptcy protection by the end of the year. 
“Under the plan, CIT expects to reduce total debt by approximately 10 billion dollars, significantly reduce its liquidity needs over the next three years, enhance its capital ratios and accelerate its return to profitability,” the company said in a statement following its Sunday board meeting.
But even if CIT restructures and survives, Herbert questions whether it will be able to regain the trust that is so crucial to lending. So what does this mean for the US economy as a whole, and its hopes for a recovery?
As the first company to declare bankruptcy after receiving government funds, CIT’s troubles could be a harbinger of worse things to come.
“CIT could just be the tip of an iceberg,” Herbert says. Its failure indicates that other firms that have taken advantage of government funds might still go under – “or at least have a lot of trouble paying back their government bailout cash”, he says. 
CIT was once responsible for lending worth about $40 billion, but the company’s fortunes took a turn for the worse after Washington rejected a request for a second bailout in July. A plan to introduce a debt-exchange plan also fell through last month, prompting the board to review the company’s capital structure to prepare for a possible bankruptcy filing despite receiving an emergency loan of $4.5 billion on October 28.
The CIT Group’s chairman and chief executive, Jeffrey Peek, said in a statement that CIT was “well-prepared” to follow through with its restructuring plan, which would allow the company’s subsidiaries to continue to operate.

CIT stands poised “to enter into the reorganisation process well-prepared and positioned for a swift emergence”, the statement said.

Date created : 2009-11-02