CIT Group Inc.’s new shares rose in their debut on the New York Stock Exchange last month, as the lender to hundreds of small sponsor-backed businesses emerged from one of the largest bankruptcies in U.S. history.
CIT, one of the biggest financial sector victims of the credit crisis, is also the only major company in the sector to emerge from bankruptcy. Others, such as Lehman Brothers, Washington Mutual and IndyMac, have been unable to continue on their own.
Hundreds of thousands of small and mid-sized businesses depend on CIT for financing, and company lawyers had said the firm needed to get through bankruptcy quickly to avoid customer defections. But the comeback may not be easy.
“In the space they are working, it is a tough time trying to secure customers for a company that has gone bankrupt,” said Robert Lutts, president and chief investment officer at Salem, Mass.-based wealth management firm Cabot Money Management. “Today, executives making decisions in the financial area are making very low-risk decisions. That means [not working] with the problem childs of the world and I think that is going to mean tough sledding for CIT.”
CIT’s new stock ended up 7.4 percent at $28.99 after opening at $27 on Dec. 10, its first day of trading since emerging from bankruptcy protection. The stock rose as much as 13.6 percent to $30.66 in the last 30 minutes of the session. At press time on Dec. 18, the company was trading just below its debut price at $26.68.
“CIT is in a new category for that kind of investor that likes to play risk reward associated with a turnaround” of the economy, said Keith Wirtz, president and chief investment officer of Cincinnati, Ohio-based Fifth Third Asset Management. “It has a higher degree for risk, but also higher potential for reward.”
The more than 100-year-old lender filed for bankruptcy in November after a debt exchange offer failed. In early December, it won approval from a New York bankruptcy judge for a prepackaged reorganization plan. The plan will reduce CIT’s debt by about $10.5 billion to about $55 billion and defer significant debt obligations for three years. Under the plan, holders of CIT’s unsecured debt will receive new notes representing 70 cents on the dollar of original debt, plus new common stock. Common and preferred stockholders, including the U.S. government, will be wiped out.
CIT’s problems stemmed in part from Chief Executive Jeffrey Peek‘s decision earlier in the decade to expand into subprime mortgages and student loans. At press-time, Peek was slated to leave the company by year-end 2009.
The New York-based lender has lost close to $6 billion since the end of 2007.
—Juan Lagorio is a Reuters correspondent based in New York