CIT Bankruptcy Gets Creditor Support

The CIT Group on Sunday filed for what it terms a different kind of bankruptcy that allows it to re-emerge by year-end under the ownership of its creditors.

The group tried in vain to avoid a bankruptcy that would result in a huge blow to the nation's small- and mid-sized businesses, which rely on financing from CIT. The company's previous efforts to push through a bond restructuring plan had failed to win bondholder support.

However, a report in The New York Times notes that creditors widely supported the pre-packaged bankruptcy plan under which they will receive about 70 cents for each dollar owed. In case of a regular bankruptcy, they would stand to settle for as little as 6 cents on the dollar. CIT said that holders of about 85% of its $30 billion in bond debt participated in the voting.

CIT, its creditors and the government have been in talks for months on possible outcomes, with bank regulators finally concluding that the company's problems did not pose a systemic risk as opposed to the cases of Citigroup and Bank of America.

The modified bankruptcy plan allows CIT to limit the impact on retailers and other companies that depend on it for factoring services, according to the report. "The decision to proceed with our plan of reorganization will allow CIT to continue to provide funding to our small business and middle market customers, two sectors that remain vitally important to the U.S. economy," said Jeffrey M. Peek, CIT's chairman and chief executive.

However, taxpayers stand to lose $2.3 billion that was invested in CIT as part of the financial rescue package last fall. While companies like Goldman Sachs(GS Quote) and Morgan Stanley(MS Quote) have repaid the government aid with interest, this new development will add to the burden of taxpayer losses in AIG(AIG Quote) and Chrysler.