A year ago today, CIT, a leading provider of financing to small businesses and middle market companies, emerged from one of the largest and most complex prepackaged chapter 11 cases to date. With approximately $71.0 billion in assets and $64.9 billion in liabilities at the time of filing, CIT was the fifth largest chapter 11 filing of any type in U.S. history. Moreover, it marked the first time a major financial institution has been able to successfully restructure after filing for chapter 11, challenging conventional views that a financial firm could not survive bankruptcy proceedings as a going concern.
With a funding model that rendered the financial firm heavily reliant on commercial paper markets, CIT was hard hit by the financial crisis of 2008 and the subsequent freeze in available credit. After preliminary restructuring efforts failed to solve CIT’s liquidity problems, on October 1, 2009, CIT launched a last ditch effort to save itself from bankruptcy with an exchange offer for over $34 billion in outstanding debt obligations. CIT concurrently solicited votes for a prepackaged plan of reorganization that was “stapled” to its exchange offer memorandum, providing a backstop for CIT in the event its exchange offer failed.
Although the exchange offer was ultimately unsuccessful, creditors overwhelmingly supported CIT’s prepackaged restructuring. CIT received almost $29 billion in votes returned (or 83% by value of its outstanding debt) on its plan of reorganization. The total number of individual votes returned was staggering; over 46,000 individual votes were recorded on CIT’s plan of reorganization, with $26.2 billion voting in favor (or 90% in total), and only $2.6 billion voting against the plan of reorganization.
CIT filed for chapter 11 in the Southern District of New York on November 1, 2009, two days before a $300 million issuance of bonds matured.
The timetable of events leading up to CIT’s prepackaged chapter 11 filing can largely be understood through the prism of CIT’s existing capital structure. To fund its lending platform, which was focused on providing loans and leases for heavy machinery and manufacturing related equipment, CIT relied on the commercial paper market. As the commercial paper market dried up during the financial crisis in 2008, CIT was left unable to refinance upcoming bond maturities – with a maturity coming due on average every two months – or to issue commercial paper to fund new loans.
CIT managed initially to stave off its upcoming maturities with government support: as liquidity concerns mounted, CIT converted to bank holding company status so that it could access $2.3 billion in Troubled Asset Relief Program (TARP) funds in 2008, with the U.S. Government acquiring perpetual preferred stock and related warrants issued by CIT in exchange for the financial support.
In a further bid to shore up its capital structure, in April 2009, the Federal Reserve authorized CIT to transfer $5.7 billion of government-guaranteed student loans to CIT Bank, its Utah bank subsidiary, with CIT Bank assuming $3.5 billion in debt and paying $1.6 billion in cash to CIT, potentially giving CIT Bank further collateral with which to access the Federal Reserve discount window, and enhancing its parent’s liquidity position.
As liquidity concerns continued to surround the business, CIT announced on July 15, 2009 that there was “no appreciable likelihood of additional government support being provided in the near term.” Hours earlier, trading of CIT’s common stock on NYSE had been suspended. As a result, CIT experienced higher than usual draws on financing commitments which, in turn, accelerated the degradation of its liquidity position.
Having been unable to sell its corporate bonds in more than a year, CIT subsequently sought a rescue facility from a group of its existing bondholders, signing up a $3 billion senior secured term loan on July 20, 2009. The rescue facility came with a high price-tag, at LIBOR + 10%, with a 3% LIBOR floor, and with a 5% commitment fee due to lenders on signing, a 2% exit fee for early retirement, and a prepayment premium of 6.5% on any amount CIT sought to reduce (reducing to zero over 18 months). The terms of the rescue facility required CIT to adopt and comply with a restructuring plan acceptable to a majority of its rescue loan steering committee by October 1, 2009.
Structuring the Exchange Offer and the Backstop Prepackaged Plan of Reorganization
Negotiations between CIT, its rescue loan steering committee, other creditors and its U.S. government regulators proceeded at full pace between July 20, 2009 and the launch of CIT’s exchange offer on October 1, 2009. CIT faced many hurdles in structuring its exchange offer and prepackaged plan of reorganization, including the following:
Risk of Seizure of CIT Bank. A large part of CIT’s restructuring strategy rested on CIT Bank. CIT had previously sought, and intended to continue to seek, the ability to transfer its existing loan platform into CIT Bank. In doing so, it would enhance the collateral base of the bank and thereby improve its ability to access the Federal Reserve discount window, where it could borrow at lower cost than in the commercial paper market. The uncertainty surrounding whether the Federal Reserve would continue to authorize such asset transfers (having rejected any further transfers pending CIT’s restructuring) jeopardized CIT’s restructuring prospects, and was followed by speculation that the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions (as CIT Bank’s state regulator) would appoint a conservator or receiver for CIT Bank. Such a move would have effectively ended any hope of CIT being restructured, and this added to the uncertainty surrounding CIT’s future viability. The myriad of State and Federal government agencies involved likely made negotiations with the U.S. government even more complicated, as did the fact that CIT was the recipient of $2.3 billion in TARP funds. CIT’s regulators never formally confirmed or approved CIT’s restructuring plan, preferring to adopt a “wait and see” approach to evaluate how a proposed exchange offer or prepackaged chapter 11 filing would play out. In consultation with its government regulators, however, CIT was required to adopt certain minimum liquidity thresholds that any exchange offer or prepackaged plan of reorganization would have to meet.
Timing. The launch of the exchange offer on October 1, 2009 allowed CIT enough time to obtain votes on its exchange offer and prepackaged plan of reorganization, before defaulting on two impending bond maturities at the beginning of November 2009 with a combined face value of $800 million. Relying on the exemption provided by Section 3(a)(9) of the Securities Act of 1933 to avoid the registration requirements of the Securities Act, CIT was able to launch its exchange offer and consent solicitation without SEC staff review. Although the Section 3(a)(9) exchange offer assisted CIT from a timing perspective, a principal disadvantage of limiting SEC staff review was CIT’s limited ability to engage and compensate an investment bank, solicitation agent, or other third parties in connection with the exchange offer, effectively limiting CIT’s ability to solicit consents to its exchange offer from its large creditor base.
Debt profile and Maturity spread. The sheer enormity of CIT’s debt burden, with over $64.9 billion in liabilities, as well as the widespread maturity profile of its bonds, made matters all the more complicated for CIT. The maturities on CIT’s bonds ranged from the most imminent, with $800 million in notes coming due a little over a month after the launch of the exchange offer, to longer term notes due in 2036, and junior subordinated notes due in 2067. The exchange offer was ultimately structured to give looming maturities a better return than longer dated maturities. The risk of default on a November 3, 2009 tranche of $300 million and a November 8 tranche of $500 million, and the subsequent cross-default implications of a failure to satisfy the bonds when due, largely drove the exchange offer timetable.
Terms of the Exchange Offer and Prepackaged Plan of Reorganization
Ultimately, following extensive negotiations with its rescue loan steering committee, CIT proposed the following terms for its exchange offer and prepackaged plan of reorganization:
Exchange offer. Earlier maturity bondholders under CIT’s exchange offer were offered 90% in second lien notes as well as preferred equity, while longer dated maturities were set to receive a lower percentage of second lien notes ranging from 90% to 70% depending on their date of maturity, and higher proportions of preferred equity. The exchange offer was conditioned upon achieving acceptable liquidity and leverage conditions, on terms thought to be acceptable to (but not officially supported by) CIT’s government regulators. These conditions required that the exchange offer could not be consummated if the face amount of CIT’s total debt was not reduced by at least $5.7 billion in aggregate, with specific debt reduction targets for debt maturing from 2009 to 2012. To hit these targets, unsecured debt maturities (excluding foreign vendor facilities) were not permitted to exceed $500 million in 2009, $2.5 billion during the period from 2009 to 2010, $4.5 billion during the period from 2009 to 2011 and $6.0 billion for the period from 2009 to 2012, in each case on a cumulative basis.
Plan of reorganization. In contrast, CIT adopted a much simpler approach to its prepackaged plan of reorganization: all CIT bondholders and holders of bank debt were offered 70% of their claim in second lien notes and common equity. Almost all senior unsecured notes were part of one single class, with the exception of a small amount of longer-dated senior notes. Under the plan, holders of approximately $34 billion of senior and subordinated unsecured debt obligations would to receive $23 billion of new second lien notes (with longer maturities) and 200 million new common shares, thus reducing CIT’s debt burden by approximately $10.4 billion and providing additional liquidity to the company. The plan also provided that approximately $3.5 billion of preferred stock obligations, including $2.3 billion of TARP invested by the U.S. Treasury and all of CIT’s common stock, would be cancelled with no distribution. In addition, on the effective date of its chapter 11 plan, CIT entered into an exit facility that repaid existing senior secured loans and added a new tranche of multiple-draw senior secured term loans. The total size of the exit facility was $7.5 billion.
On October 1, 2009, CIT launched its exchange offer and solicitation on the prepackaged plan. CIT sought to solicit consents to both the exchange offer and the prepackaged plan of reorganization at the same time, by “stapling” its prepackaged plan of reorganization to its offering memorandum, ensuring that bondholders would have the ability to vote on both restructuring options during the solicitation period. The exchange offer memorandum warned creditors that if CIT was unsuccessful in obtaining sufficient consents for either the exchange offer or the prepackaged plan, CIT would likely file a traditional free fall case where distributions to stakeholders would likely be much lower than being offered under the exchange offer and prepackaged plan. While the exchange offer was unsuccessful in that insufficient holders agreed to exchange their debt to meet the minimum liquidity and leverage thresholds, CIT was successful in obtaining sufficient votes for confirmation of its prepackaged plan.
The Chapter 11 Proceedings
CIT thus filed for chapter 11 in the Southern District of New York on November 1, 2009. In contrast to the frenetic year leading up to the filing, CIT’s chapter 11 cases were among the swiftest, and smoothest, in recent memory, with a successful confirmation hearing held 34 days after filing, on December 8, 2010, and the effective date under the plan of reorganization occurring two days later on December 10, 2009. Conventional wisdom has now been challenged: a financial firm can survive chapter 11 proceedings and emerge as a successful competitor in the marketplace. The lingering question is how much the turbulent financial currents of the time and the risk of regulatory reprisals on contrarians and naysayers contributed to the high level of lender support and ultimate success of the transaction.