NEW YORK If struggling U.S. commercial lender CIT Group Inc were to collapse it would be a "drastic mistake" as the small businesses that rely on it would have few alternate sources of funding, turnaround experts said at the Reuters Restructuring Summit this week.
"I have a great fear of the collapse of CIT and that people don't understand the ramifications of what that can be," Lynn Tilton, chief executive of distressed investment firm Patriarch Partners said, adding she believed any collapse would result in millions of job losses at smaller U.S. companies.
"I think it would be a very, very drastic mistake in this country to allow CIT to go under," Tilton said.
CIT is planning to offer its unsecured debt holders an option to either exchange their debt voluntarily or face a pre-packaged bankruptcy, sources close to the situation said on Wednesday.
Shares of CIT fell 40 percent on Wednesday on fears that however the company rights itself, be it with a debt exchange or bankruptcy, equity holders will get little. But if those options do not work, there is unlikely to be any company able to fill CIT's shoes, the experts said.
"Over 80 percent of our workforce lies in small and mid-size companies, and yet there is absolutely no credit available to these companies," Patriarch's Tilton said.
"Large banks, who have been able to find their way back from the abyss, are not making these loans, and the regulators on the ground are telling them not to make these kinds of loans. It is not the best use of their capital. They are high risk. They are small. It takes a lot of energy. And our smaller regional and community banks are on the cusp of failure."
And while CIT's need to restructure has been telegraphed for months, retailers and other small businesses, which are particularly reliant on their funding, appear to have done little to prepare for a collapse, said Cory Lipoff, an executive vice president at Hilco Merchant Resources who works with distressed retailers.
"Everybody has adopted a wait-and-see attitude," Lipoff said. "Everybody is uncertain and cautious, but nobody is taking any actions right now," Lipoff said at the summit.
Part of the issue for retailers and other businesses that rely on CIT for loans, is that it remains unclear how a bankruptcy would affect their contracts, turnaround experts said. If CIT goes through a pre-packaged bankruptcy, or ends up with deals to sell some units, their loan contracts might not change at all. If its bond exchange is successful, there may also be no change.
"My partner went out and talked to retail lenders (about CIT)... and the message that came back is 'We're just going to wait and see how this all plays out over the next 60 days,'" Lipoff said.
Few financial companies have survived bankruptcy, but CIT believes its customers will continue to borrow from it even if it is reorganizing in bankruptcy court, the sources said.
But the lurking possibility of a free-fall bankruptcy could actually be useful to CIT in gaining support for its plans at this stage, another turnaround expert said.
"Clearly CIT is negotiating in the shadow of bankruptcy," said Corinne Ball, the attorney at Jones Day who led Chrysler through its bankruptcy earlier this year. Ball said the threat of bankruptcy can push the company's stakeholders to more "productive discussion" about what course to pursue and force bondholders to think about what they would get if the company were to fail.
(For summit blog: blogs.reuters.com/summits/)
(Reporting by Emily Chasan, editing by Leslie Gevirtz)