CIT collapse would be a mess, turnaround pros say

October 1, 2009
http://www.reuters.com/article/newsOne/idUSTRE59003620091001

NEW YORK (Reuters) - If struggling U.S. commercial lender CIT Group Inc were to collapse it would be a "drastic mistake" as the small businesses that rely on it would have few alternate sources of funding, turnaround experts said at the Reuters Restructuring Summit this week.

"I have a great fear of the collapse of CIT and that people don't understand the ramifications of what that can be," Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said, adding she believed any collapse would result in millions of job losses at smaller U.S. companies.

"I think it would be a very, very drastic mistake in this country to allow CIT to go under," Tilton said.

CIT is planning to offer its unsecured debt holders an option to either exchange their debt voluntarily or face a pre-packaged bankruptcy, sources close to the situation said on Wednesday.

Shares of CIT fell 40 percent on Wednesday on fears that however the company rights itself, be it with a debt exchange or bankruptcy, equity holders will get little. But if those options do not work, there is unlikely to be any company able to fill CIT's shoes, the experts said.

"Over 80 percent of our workforce lies in small and mid-size companies, and yet there is absolutely no credit available to these companies," Patriarch's Tilton said.

"Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure."

And while CIT's need to restructure has been telegraphed for months, retailers and other small businesses, which are particularly reliant on their funding, appear to have done little to prepare for a collapse, said Cory Lipoff, an executive vice president at Hilco Merchant Resources who works with distressed retailers.

"Everybody has adopted a wait-and-see attitude," Lipoff said. "Everybody is uncertain and cautious, but nobody is taking any actions right now," Lipoff said at the summit.

Part of the issue for retailers and other businesses that rely on CIT for loans, is that it remains unclear how a bankruptcy would affect their contracts, turnaround experts said. If CIT goes through a pre-packaged bankruptcy, or ends up with deals to sell some units, their loan contracts might not change at all. If its bond exchange is successful, there may also be no change.

"My partner went out and talked to retail lenders (about CIT)... and the message that came back is 'We're just going to wait and see how this all plays out over the next 60 days,'" Lipoff said.

Few financial companies have survived bankruptcy, but CIT believes its customers will continue to borrow from it even if it is reorganizing in bankruptcy court, the sources said.

But the lurking possibility of a free-fall bankruptcy could actually be useful to CIT in gaining support for its plans at this stage, another turnaround expert said.

"Clearly CIT is negotiating in the shadow of bankruptcy," said Corinne Ball, the attorney at Jones Day who led Chrysler through its bankruptcy earlier this year. Ball said the threat of bankruptcy can push the company's stakeholders to more "productive discussion" about what course to pursue and force bondholders to think about what they would get if the company were to fail.

Tilton has seen up-close the effects the economy is having on middle America. Her company has investments in 73 companies, many of them manufacturers. "I spend a lot of time out with my people," she says. "People are suffering. Outside [of Washington] in middle America, you're finding unemployment rates well above 20 percent."

According to Tilton, the kind of loans industry used to have--basic capital loans that allowed companies to finance the timing between buying materials and getting paid for the product they make--aren't available right now. And without everyday working capital loans, "These companies have no chance for existence," Tilton says.

Tilton's even looking into acquiring financial institutions to bring relationship lending back to American business.

Industry is where the largest number of losses are occurring, Tilton says. "Unless we've made the decision that we don't need to be the maker of things ... then we're making a huge mistake. Not to mention that if we've decided that we don't need to be the maker of things, we've made even a bigger mistake. Because every great empire has been built upon the manufacturing economy. And the fall of every great empire has been the failure to remember that fundamental fact."

Tilton points out the irony of government funding: "We can go to Washington and get money from the IFC [International Finance Corp.] or OPEC to go build manufacturing facilities on the other side of the world to create a developing economy and put people to work so they can make money and provide for their families with dignity," she says. "But you couldn't get money from the government to save companies and provide jobs for Americans."

Tilton says America can't sit around waiting for banks to begin lending again. "It's too late. Most of these companies are already in deep distress by not having had access to capital, and everybody's lost revenue. So if you've had no access to capital, chances are you're not going to survive.

"What people don't realize is, a lot of these jobs have been lost forever. Day after day our industry in America is liquidating. And so there's no place to hire back."