WASHINGTON — After struggling for months to avert bankruptcy, lender CIT Group filed for Chapter 11 protection Sunday in New York in an attempt to restructure its debt while trying to keep badly needed loans flowing to thousands of midsized and small businesses.
Analysts warned that the bankruptcy could add to the uncertainty around loans for the nation's small businesses, especially retailers, which make up a significant portion of CIT's clients and are already struggling with tight credit markets.
CIT is the financier for about 2,000 vendors that supply merchandise to more than 300,000 stores, many of which are gearing up for the critical holiday shopping season. They rely on the lender to cover costs ranging from paying for orders to making payroll. Any disruption caused by bankruptcy could wreak havoc on their operations, said Joe Alouf, a partner with Eaglepoint Advisors, a crisis management company that is partly owned by Kurt Salmon Associates.
"CIT is the 600-pound gorilla in the industry," Alouf said.
But CIT has already pulled back sharply on its lending to businesses as it tried to preserve cash.
The Chapter 11 filing is one of the biggest in U.S. corporate history, following Lehman Brothers, Washington Mutual, WorldCom and General Motors. CIT's bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion.
A prepackaged bankruptcy, which has the support of major bondholders, speeds up the process of restructuring CIT's debt and could allow it to exit court protection by the end of the year. In addition to reducing its debt, CIT said the plan cuts cash needs over the next three years, which should help it return to profitability more quickly.
"The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle-market customers, two sectors that remain vitally important to the U.S. economy," said Jeffrey M. Peek, chairman and chief executive officer. Peek has said he plans to step down at the end of the year.
CIT's move will wipe out current holders of its common and preferred stock. That means the U.S. government will likely lose the $2.3 billion it sunk into CIT last year in return for preferred shares to prop up the ailing company. The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year.
Treasury Department spokesman Andrew Williams said the government will be closely monitoring the bankruptcy proceedings, but acknowledged that "recovery to preferred and common equityholders will be minimal."