CIT and Pimco: Collateral Damage

NEW YORK (TheStreet) -- The resignation of two key creditors from a steering committee of CIT Group(CIT Quote) bondholders could actually increase the chance of the company avoiding a bankruptcy filing.

The creditors, PIMCO and Baupost Group, were part of a group of six investors that extended an emergency $3 billion loan to CIT in July after the FDIC declined to guarantee its debt, as it had done for larger lenders including Citigroup(C Quote), Bank of America(BAC Quote) and General Electric(GE Quote).

That group, which also includes Centerbridge Partners LP, Oaktree Capital Management LLC, Capital Research & Management Co. and Silver Point Capital LP, according to published reports, comprised a steering committee that has played a crucial role in negotiating with the company as it seeks to restructure its debt to avoid filing for bankruptcy. CIT unveiled a proposal to its bondholders last week, asking them to accept a fraction of what they were owed in exchange for new bonds and equity in a restructured company. CIT has said $10 billion worth of bondholders were on board with the plan. Still, it needs a greater number if it is to avoid a bankruptcy filing.

Nearly all parties connected to CIT would be better off if it avoided bankruptcy, except credit default swaps holders such as Goldman Sachs(GS Quote), which has a substantial CDS position, according to a Financial Times report,. The bondholders on the steering committee would presumably want to avoid a bankruptcy, but looked like they would fare quite well in any event, as they had a strong claim on the company's assets. For that reason, the departure of PIMCO and Baupost is surprising. They left the committee a month ago, according to a Bloomberg report.