CIT Group (NYSE: CIT) Files for Bankruptcy Protection

Today, what seemed like the inevitable finally happened: CIT Group filed for bankruptcy protection in a New York court. The company tried to avert this for many months, but now seems to be embracing the Chapter 11 protection they have sought.

While bankruptcy has an obvious negative connotation, this may end up good for CIT. In Chapter 11, they will try to restructure their debt, while keeping capital flowing to small and mid-sized businesses across the country. CIT tried to avert this through a late inning debt-exchange offer to bondholders, but when that failed finally filed a prepackaged reorganization on Sunday. Under the conditions of the proposal, CIT will be able to continue doing business, while reducing their total debt by $10 billion.

Examining the financials, the business is far too highly leveraged, and will benefit by emerging under a new structure. Currently, the firm’s filing shows $71 Billion in finance and leasing assets, against $64.9 Billion in total debt. CIT expects to exit Chapter 11 by the end of this year, while reducing debt and freeing up cash flows.

CIT’s move will wipe out current holders of its common and preferred stock. That means the U.S. government will likely lose the $2.3 billion it sunk into CIT last year in return for preferred shares to prop up the ailing company. Jeffrey Peek, Chairman and CEO of CIT has concurrently announced he plans to step down at the end of the year.

This will likely create a strong ripple effect in the financial markets this week. Already reeling from a difficult earnings season, Common stockholders set to lose their investment include FMR LLC of Boston with a 9.9 percent stake in CIT and San Diego-based Brandes Investment Partners LP with a 9.7 percent equity position, according to CIT’s filing.

CIT is the financier for about 2,000 vendors that supply merchandise to more than 300,000 stores, many of which are gearing up for the critical holiday shopping season. They rely on the lender to cover costs ranging from paying for orders to making payroll. Any disruption caused by bankruptcy could wreak havoc on their operations, so the market will be paying close attention this week to ensure the credit is still flowing. Analysts warned that the bankruptcy could add to the uncertainty around loans for the nation’s small businesses, especially retailers, which make up a significant portion of CIT’s clients and are already struggling with tight credit markets.