About three months ago I predicted that CIT would file Chapter 11 bankruptcy on November 1. Yesterday I was watching the news all day and finally at about 3:30 p.m. I saw that it had done so.
CIT represents the fifth largest bankruptcy in
What does all this mean to small businesses that borrow as much as $2.3 billion at any one time for working capital? Hopefully nothing.
Part of the strategy of a prepackaged bankruptcy is that the company entering Chapter 11 has agreed in advance on most of the key issues so most credit parties are in agreement before the fillings are ever made. In the case of CIT, it received a $4.5 billion loan from Citi Bank to allow it to continue operating under the bankruptcy trustee’s supervision while the company goes through the reorganization process. This financing is called debtor in possession (or DIP) financing. The bankruptcy court protects the DIP financing source to make sure it gets all its money back.
CIT is expected to reach agreements with all its creditors and reemerge from Chapter 11 by the end of the year. Many agreements must be reached and many bankruptcy court hearings must be held.
CIT’s goal is to keep the company in one piece. In the end, it may be broken up into several companies so more creditors can be paid.
The parties that get hurt as a result of this bankruptcy are common shareholders, who will have their entire interest in the company lost;
Hopefully, small businesses that rely on CIT for factoring and asset-based lending will be able to continue as usual. My advice to those companies is to move to a more stable financing partner as soon as possible.
This bankruptcy is the first ever of its kind involving a company that holds cash reserves as factors and ABL lenders do.
The wild card involves the cash coming through the factoring lockbox. Business owners factoring are counting on reserve money coming back when one of their debtors pays. Many of CIT’s factoring transactions are full recourse. Unfortunately, the bankruptcy court could rule that the factored invoice is an asset of the company. It may require customers of CIT to lose some of their reserve money. We have a saying in banking that I strongly believe in. “The first loss is the least.” So if you’re a CIT factoring customer get out, take whatever loss you must, and move to a more stable financing company as soon as possible.
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