Treasury Loses Out in CIT Bankruptcy

NEW YORK (TheStreet) -- The U.S. Treasury has likely lost its entire $2.33 billion preferred investment in CIT Group (CIT Quote) after bondholders and the board approved the company's proposed prepackaged bankruptcy filing over the weekend.

Under the plan, two junior classes of debtholders and preferred shareholders including the U.S. Treasury are to receive securities known as contingent value rights (CVRs), while senior bond holders get a combination of new bonds and equity. Common shareholders will get nothing.

The documents describing how the CVRs work are thick with legalese, but Jeff Werbalowsky of Houlihan Lokey, advisor to a steering committee of senior CIT bond holders, translated it into English for me.

Here's how the CVRs work: Now that the plan has been approved, the new CIT bonds and shares will begin trading as soon as is practical. If after 60 days they turn out to be worth enough to allow a full recovery for the old (pre-bankruptcy) debt holders, they will be paid in full and any residual value would go to the two junior bond holder classes. If and when they recover what they were owed by CIT, the rest would go to Treasury and the other old (pre-bankruptcy) preferred shareholders. If the new securities do not go up in value enough to pay off all the old debt holders in 60 days, the CVRs will become worthless.

One person involved in the negotiations, who did not want to be quoted for fear of appearing to thumb his nose at the Treasury, believes it is highly unlikely the CVRs turn out to be worth anything. A Treasury spokeswoman did not respond to an e-mail message seeking comment.