Thousands of small and mid-sized businesses are depending on the lender CIT Group to keep their loans afloat during their recent Chapter 11 bankruptcy protection filing, while restructuring their debt, as reported by the Huffington Post and the Financial Times.
The filing will allegedly wipe out the current holders of its common and preferred stock - causing a $2.3 billion loss to U.S. government and taxpayers. While the $2.3 billion that was invested only a year ago in CIT stands to be lost, Goldman Sachs stands to gain $1 billion in the bankruptcy.
On October 4 The Financial Times reported that Goldman Sachs extended $3 billion to CIT on June 6, 2008. Five months later the treasury bought $2.3 billion in CIT preferred shares.
Goldman may demand the full sum but CIT claims that the two are in negotiations "concerning an amendment to this facility."
The Financial Times also reported that since the government began infusing banks with capital, this $2.3 billion will represent the largest amount of taxpayer funds lost.
CIT filed on August 27 in New York bankruptcy court. CIT said that they filed after failing in a debt-exchange offer to bondholders.
Bondholders approved a prepackaged reorganization plan that reduces the total debt by $10 million and allows the business to continue running.
Jeffrey M. Peek, CIT chairman and CEO, said, "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."
Peek added that he will be stepping down as CEO of the company by the end of 2011.
CIT lists $71 billion in finance and leasing assets and debts totaling $64.9 billion. The company almost collapsed in July and has struggled to find new funding sources.
Lenders and bondholders gave CIT $4.5 billion in credit - allegedly with help from Goldman Sachs - and another $1 billions in credit was extended to them by bondholder and large investor C.I.
Bondholders, remaining unconvinced, failed to support a debt-exchange offer. Had they agreed, CIT's debt would have been reduced by $5.7 billion, and they would have had been given more time to pay off what they owe.
CIT's bankruptcy filing is one of the largest in U.S. corporate history to date. Other larges businesses, General Motors and Chrysler, have also filed for bankruptcy protection.
Small businesses that rely on CIT for loans, at a time when credit is dwindling, may be affected by the filing. Analysts speculate that small business owners, that need loans to cover purchases, may be the hardest hit.
CIT currently serves as a short-term financier to nearly 2,000 vendors that over 300,000 retails stores depend on for their merchandise.
Considering a business or personal bankruptcy? Contact a bankruptcy attorney for help with your filing and to protect as much of your assets that you can.