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October 30, 2009 2:41 PM

CIT Files for Bankruptcy Despite Icahn Loan

Posted by Zach Lowe

Update, Nov. 1, 2009 at 10 p.m.  - As expected, commercial lender CIT Group filed for Chapter 11 Sunday in U.S. Bankruptcy Court in Manhattan, listing $71 billion in assets and $64.9 billion in debt. The filing ranks as one of the largest by a financial institution. A $1 billion loan from Carl Icahn, reported Friday afternoon (see below), will fund operations while CIT reorganizes as part of a prepackaged bankruptcy. As noted below, Skadden, Arps, Slate, Meagher & Flom will serve as CIT's bankruptcy counsel. Click here for the New York Times report on the filing and here for Bloomberg's take.

CIT Group, the commercial lender struggling under mountains of bond debt, will likely file for bankruptcy in the next few days despite a last-minute $1 billion financing agreement with Carl Icahn, according to news reports.

The agreement represents a bit of a turnaround from just days ago, when CIT Group, repped by Skadden, Arps, Slate, Meagher & Flom, rejected Icahn's offer to loan the company $4.5 billion and instead accepted a similar offer from a group of senior lenders headed by Bank of America and Merrill Lynch. (Skadden will serve as CIT's bankruptcy counsel should the lender file for Chapter 11 this weekend, according to lawyers working on the deal.)

As we've reported before, CIT was hoping to avoid a bankruptcy filing through a debt exchange offer. The lender asked bondholders to exchange their debt for equity in the company or new debt that would mature later. CIT hoped to reduce its outstanding bondholder debt--now at around $31 billion--by about $6 billion. The deadline on that exchange has passed, and CIT is counting up the votes, according to a company release. It is believed to have failed, The Wall Street Journal reports, meaning CIT will pursue its back-up plan--a prepackaged bankruptcy. The company's senior bondholders, who hold about $10 billion of the outstanding debt, have already approved the terms of the prepackaged bankruptcy. Andrew Rosenberg of Paul, Weiss, Rifkind, Wharton & Garrison is representing those bondholders. Under the prepackaged terms, bondholders would receive new debt worth 70 cents on the dollar and all the equity in a reorganized CIT, according to the WSJ. 

Rosenberg and the lead Skadden lawyers on the matter did not immediately return calls seeking comment. Sonnenschein, Nath & Rosenthal is representing Icahn on the matter, according to sources familiar with CIT's restructuring. Icahn holds about $2 billion of CIT's debt and has opposed the prepackaged bankruptcy; he believes a liquidation process would net more for creditors. The $1 billion Icahn agreed to loan CIT is intended to back up the $4.5 billion loan CIT secured Wednesday and could also be used as debtor financing should CIT file for Chapter 11, according to the WSJ and Bloomberg. Peter Wolfson, a Sonnenschein partner who has advised Icahn and his affiliates in the past, did not respond to messages seeking comment. 

One other bit of CIT news: The lender agreed with Goldman Sachs on a separate deal that restructures the terms of a $3 billion emergency loan from Goldman, according to Reuters and lawyers working on the deal. In effect, CIT paid Goldman a $285 million fine to reduce the overall value of the original loan by about $875 million to $2.13 billion, according to Reuters. The prior terms had required CIT pay Goldman $1 billion in the event of a bankruptcy filing, Reuters says. 

Cleary Gottlieb Steen & Hamilton advised Goldman in the loan restructuring, according to lawyers familiar with the matter. Sullivan & Cromwell is providing counsel to CIT's board.

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