CIT Group files for bankruptcy

CIT made the filing in New York bankruptcy court after a debt-exchange offer to bondholders failed. CIT said in a statement that its bondholders overwhelmingly opted for a prepackaged reorganization plan that would reduce total debt by $10 billion while allowing the company to continue to do business.

The Chapter 11 filing is one of the biggest in US corporate history, following Lehman Brothers, Washington Mutual, WorldCom, and General Motors. CIT’s bankruptcy filing shows $71 billion in finance and leasing assets against total debt of $64.9 billion.

A prepackaged bankruptcy, which has the support of major bondholders, accelerates the process of restructuring CIT’s debt and could allow it to exit court protection by the end of the year. In addition to reducing its debt, CIT said the plan cuts cash needs over the next three years, which should help it return to profitability more quickly.

“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 US economy,’’ said Jeffrey M. Peek, chief executive. Peek has said he plans to step down at the end of the year.

CIT’s filing will test whether a financial company can survive the Chapter 11 process. Bankruptcy has long been considered a death knell for lenders, whose existence depends on the confidence of its creditors and customers. The company’s struggles have been watched with interest and trepidation by analysts and the thousands of small and midsize businesses that borrow from CIT.

The filing would wipe out current holders of its common and preferred stock. That means the US government will probably lose the $2.3 billion it sunk into CIT last year in return for preferred shares to prop up the ailing company. The government could have lost billions more, however, had it not declined to hand over more aid to the company earlier this year.

Common stockholders with CIT set to lose their investment include Fidelity Investments, with a 9.9 percent stake. CIT has been trying to fend off disaster for several months and narrowly avoided collapse in July. It has struggled to find funding as sources it previously relied on, such as short-term debt, evaporated during the credit crisis.

The company received $4.5 billion in credit from its own lenders and bondholders last week, reportedly made a deal with Goldman Sachs to lower debt payments, and negotiated a $1 billion line of credit from billionaire investor and bondholder Carl Icahn. But the company failed to persuade bondholders to support a debt-exchange offer.

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.

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 severely disrupt operations, said Joe Alouf, a partner with Eaglepoint Advisors, a crisis management company.

“CIT is the 600-pound gorilla in the industry,’’ Alouf said.

But CIT has already pulled back sharply on its lending to businesses as it tried to preserve cash. According to its most recent quarterly earnings report, the company originated just $4.4 billion worth of new business during the first six months of 2009 compared with $11.3 billion in the first half of 2008.

Material from The New York Times was used in this report.