Is the financial crisis continuing to claim large companies?
*The Economist, November 2, 2009
”THE most gut-wrenching failures may be over, but the financial crisis continues to claim the occasional big victim. CIT, a lender to small and medium-sized businesses, from clothing retailers to Dunkin’ Donuts franchisees, filed for bankruptcy on Sunday November 1st after failing to garner enough support for a debt-restructuring plan. With $71 billion in assets, the century-old firm is only one-ninth the size of Lehman Brothers, which collapsed in September 2008. Nevertheless, its Chapter 11 filing augurs ill for America’s corporate minnows, whose financing options have narrowed dramatically over the past year.
Financial-services firms have a harder time than most bouncing back from bankruptcy, because their business relies so heavily on trust, which has a tendency to evaporate in such situations. CIT has improved its chances by securing the support of the vast majority of its bondholders for a ‘prepackaged’ filing that will reduce its debt by $10 billion while allowing its subsidiaries to go on operating. Among those persuaded to come on board is Carl Icahn, a veteran corporate gadfly who had been trying to derail CIT’s restructuring in the hope of profiting by picking through its entrails; he has even offered a $1 billion back-up loan. The firm’s advisers say it could emerge from bankruptcy by the end of the year.
The pain will be widely felt. Bondholders will be handed new CIT debt worth about 70% of the face value of their old paper. They include a group of distressed-debt funds that gave it rescue financing over the summer, then committed $4.5 billion more as the firm continued to totter. Even Goldman Sachs, Wall Street’s savviest and best-connected firm, is taking a hit of sorts. Perhaps mindful that it could do without more bad publicity of the ‘vampire squid’ sort, it renegotiated the terms of a loan facility that would have triggered a $1 billion payment if CIT went bust. Goldman will now get only $535m, half of that in collateral.
The biggest losers, of course, are shareholders, who will be wiped out as creditors take the equity in the new company. Also likely to lose their shirts are preferred shareholders, including the hapless taxpayer, who handed over $2.3 billion of funds from the Troubled Asset Relief Programme last December.”
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