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CIT agrees pre-pack bankruptcy

US-based commercial lender CIT Group filed for bankruptcy last night, as the global credit crisis left it unable to fund itself and the recession left it with too many bad loans.<br /><br />CIT&rsquo;s creditors have already approved the century-old lender&rsquo;s pre-packaged plan, which will result in them owning the company. <br /><br />Most bondholders will also end up with new CIT debt worth about 70 per cent of the face value of their old debt. Preferred shareholders, including the US government, will get money only after other creditors are paid back. Current common shareholders will receive nothing.<br /><br />The US government invested $2.33bn in CIT preferred shares in December 2008 through the Troubled Asset Relief Program (Tarp), which it is now not certain to get back.<br /><br />CIT said that the pre-packaged plan will allow it to reduce its total debt by about $10bn (&pound;6.1bn), enhance its capital ratios and accelerate its return to profitability<br />&ldquo;The decision to proceed with our plan of reorganisation 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,&rdquo; said CIT chairman Jeffrey M Peek. <br /><br />CIT&rsquo;s operating subsidiaries, including Utah-based CIT Bank, are not included in the bankruptcy filing, and expect to continue operating, the company said in a statement.<br /><br />CIT financed itself mainly by borrowing from bond markets, which has proven to be a flawed strategy as the credit crunch has made it much more expensive for troubled companies to fund themselves.<br /><br />The firm had been working hard to win bondholder support for its plan to restructure, and on Friday it announced key agreements with creditors, including support from billionaire investor Carl Icahn, who had previously been the main opponent to the company&rsquo;s plans. Icahn give the firm a&nbsp; provision for an additional $1bn in financing from Icahn Capital.<br /><br />CIT also announced an agreement with Goldman Sachs that would reduce a $3bn credit line to $2.13bn, with the line open during bankruptcy.<br /><strong><br />FAST FACTS CIT BANKRUPTCY<br /></strong>CIT&rsquo;s is the fifth largest bankruptcy in US history, behind Lehman Brothers, Washington Mutual, Worldcom and General Motors.<br />CIT was founded in St Louis in 1908 by Henry Ittleson, who noticed that many wholesalers were unable to get loans.<br />Tyco International agreed to buy CIT for about $10bn (&pound;6.1m) in 2001 but was forced to spin it off to shareholders a year later as Tyco struggled with a massive debt burden.<br />Corporate raider Carl Icahn, who had previously fought the board over the bankruptcy plan, played a pivotal role when he had a change of heart on Friday. The billionaire and Bruce Wasserstein were central to the attempted break-up of Time Warner in 2006.<br />The government injected $2.33bn into the ailing lender last year, an investment that could now be wiped out.<br />The idea behind a prepackaged bankruptcy plan is to shorten and simplify the bankruptcy process in order to save the company money in legal and accounting fees, as well as the amount of time spent in bankruptcy protection. <br />