NEW YORK | A Chapter 11 filing usually means the end of the road for financial companies because they rely so heavily on customer trust. CIT Group Inc. is hoping that its case will be different.
The commercial lender’s trip through bankruptcy reorganization may well be speedy, given that it’s already reached agreements with creditors on restructuring its debt. But the real test will come from CIT customers, who could decide to take their business elsewhere.
“Their image is tarnished right now,” said Len Blum, a managing partner at investment bank Westwood Capital.
“They have an uphill climb, because they are only worth the value of the portfolio,” Mr. Blum said of CIT’s pool of loans it has extended to customers.
Just as a bank would fail if all of its depositors tried to get money out at the same time, CIT wouldn’t be able to survive if too many of its customers close their accounts. Some have already been pulling their business in recent months as CIT struggled for survival, but it’s still too early to know how many will remain.
CIT is one of the nation’s biggest lenders to small and midsized businesses, providing financing to a large array of businesses, including retailers, energy companies, a small movie studio and operators of Dunkin’ Donuts shops.
CIT filed for Chapter 11 bankruptcy protection Sunday in New York after teetering on the brink of collapse for months. The company ran into trouble as rising costs to finance its operations outpaced the money it took in from providing loans. The prearranged bankruptcy plan with creditors will reduce its debt by about $10 billion.
The government gave CIT $2.3 billion last fall as part of a rescue of other banks and lenders, though there is now little hope of that money being recovered. CIT’s stockholders would also be wiped out under the reorganization plan. The government declined a subsequent plea this summer for more even funds from CIT after concluding that any fallout from a possible collapse of the lender would be manageable.
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