While CIT Group Announces More "Restructuring," Bankruptcy Still Unclear

Throughout the week, a burning question has been on the lips of investors, bankers and business owners alike: “Is CIT filing for Chapter 11?” Despite a flurry of announcements Friday, no one is that much wiser.

CIT Group (NYSE: CIT) has been slowly nearing bankruptcy since August, when it arranged a last-minute deal with its bondholders to delay the repayment of billions of dollars in short-term debt maturities. Throughout the fall, while other financial organizations have prospered, CIT’s directors have been focusing on trying to keep the firm alive.

Those strategies seem to be succeeding, but it’s still unclear to what extent. Today, the small business lender — whose survival many argue is crucial to a quick U.S. economic recovery — announced that it had arranged with Goldman Sachs (NYSE: GS) to reduce an outstanding $3 billion loan to $2.13 billion.

Wednesday, hedge funds agreed to pony up $4.5 billion in order to help CIT fend off a hostile debt bid by Carl Icahn. Most recently however, the embattled lender appears to have made peace with the former Wall Street Raider: today, it said that it has agreed a deal where Icahn will provide $1 billion in financing if the hedge funds’ billions don’t turn out to be enough to see it through its troubles. (In return, Icahn agreed to back down from making bondholders a counter-offer for their notes.)

Here’s the problem: It’s a well known fact that Icahn wants CIT to file for Chapter 11. The same cannot be said for the firm’s directors however, many of whom are common stockholders and would take a substantial financial beating in the event of a bankruptcy. In fact, this week it appears that the company has been eager to dispel that possibility in the minds’ of market participants, as it has gravitated towards referring to its moves as just a “restructuring.”

On stock message boards, debate over this issue is rapidly turning downbeat: “The restructuring plan leaves nothing for the common holder. Looks like he’s (sic) screwed to me,” speculates one investor. Seeking Alpha reports in its Market Currents Section:

CIT Group (CIT) agrees to accept $1B in backup financing from Carl Icahn, to be tapped if it needs more than the $4.5B it accepted from other bondholders. For his part, Icahn will back down while the company restructures in bankruptcy; it plans to file as soon as Sunday night or early Monday and Icahn will vote for the plan. CIT’s debt exchange likely failed. Shares picked up a bit as trading resumed, now down 16%.

But for all the apparent certainty of a bankruptcy filing, the issue still remains far from clear-cut. For a start, it wouldn’t suit the political agenda of the current White House administration at all to be seen as bailing out Goldman Sachs but not saving a small-business lender. Secondly, if a CIT bankruptcy culminated in a Lehman Brothers-style fiasco, President Obama would be viewed by many as just another incompetent politician grappling with an economy and a stock market that he doesn’t quite get. In that case, it would be much easier for Treasury to execute a last-minute bailout of the firm and explain to taxpayers that this time, their money is actually saving their businesses.

Further, Goldman Sachs’ interests are hardly served in the event of a bankruptcy: it essentially gets a billion dollars less now than it would have a week ago in the event of Chapter 11. It’s hard to think that Goldman wouldn’t have mandated a no-bankruptcy clause in the negotiations of the loan reduction announced this morning.

It still remains to be seen what will transpire. But one thing is for sure: a CIT bankruptcy would a cost a lot of players a ton of capital: political and financial.

Disclosure: I own a small number of shares in CIT Group.