Published: Monday, 2 Nov 2009 | 11:17 AM ET

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[CIT  Loading...      ()   ]bankruptcy filing could push at least some small businesses it finances to look for a new lender, but finding new credit will be tough.

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CIT filed for bankruptcy protection on Sunday, and said its creditors have already approved its reorganization plan.  

The bankruptcy was long expected and followed a struggle to deal with its debt burden amid the credit crunch and recession, and paves the way for it to restructure its liabilities.

However, the bankruptcy case was reassigned on Monday to U.S. Bankruptcy Judge Allan Gropper following the recusal of Judge Robert Gerber, who had been assigned the case hours earlier.

A courtroom deputy for Gropper said Gerber recused himself from the case. The deputy did not give a reason for the recusal. Gerber's chambers had no immediate comment.

Under the plan announced on Sunday, CIT expects to reduce total debt by about $10 billion. The company's operating units are not in bankruptcy, and plan to continue lending.

But the company's long-term prospects are uncertain and the bankruptcy could leave more than one million small and medium-sized businesses looking for another source of funding, even if CIT's doors are still open, lawyers said.

Clients for CIT's factoring business are in a particular bind when it comes to finding alternative financing since CIT is by far the biggest company in the sector, where lenders buy unpaid customer bills from companies.

What's more, many of the factoring clients are in the garment industry, where they already face a bleak holiday season and where credit is generally tight.

"In the best of times you would have seen a situation where other lenders would certainly have been willing to consider getting into this business," said Mark Jacobs, a partner in law firm Pryor Cashman's bankruptcy group. "In the current environment, given the constraints on credit generally, there's not enough capacity out there," he added.

In the first six months of the year, CIT lent just $65 million in Small Business Administration loans, one percent of the total lent in this category over that time period. In 2008, CIT was the top SBA lender in dollar terms, providing 6 percent of all SBA lending, according to the National Small Business Association.

At the same time, banks are also broadly cutting back on lending to small and medium-sized businesses. Banks' lending to small companies fell by about 2 percent, or $14.8 billion, for the year through June, according to data from the Federal Deposit Insurance Corp.

The NSBA had expressed its concern about a potential CIT bankruptcy and in July wrote to U.S. Treasury Secretary Timothy Geithner to ask the government to consider assisting CIT. It may discuss a similar lobbying effort again, spokeswoman Molly Brogan said in an interview before the bankruptcy filing.

Uncertainty About Operations

The major question for CIT's factoring clients is whether that unit will continue to operate as usual while its parent goes through bankruptcy. 

The lender said on Sunday that all operating entities are expected to continue functioning normally, and that it hopes to be out of bankruptcy by the end of the year.

CIT's factoring business, worth about $42 billion in 2008, is estimated to be at least five times the size of its closest competitor, Wells Fargo & Co, followed by other smaller companies such as GMAC Inc and Rosenthal & Rosenthal. It is not clear if these rivals have enough capacity to take on all of CIT's existing customers.

Many of those clients, anticipating funding problems from CIT, drew down on their credit lines earlier this year. In one week in July alone — before the company secured an emergency loan from bondholders — CIT said in a filing it had $700 million of draws, about twice the normal level.

The company has said in filings that it hopes to complete a quick restructuring that would have minimal impact on its clients. Some 90 percent of CIT's creditors have approved the bankruptcy plan.

Still, a lot about any bankruptcy process is uncertain, and that has CIT clients worrying about the security of their financing.

"The businesses that I'm talking to are very nervous," said Vano Haroutunian, lawyer at Ballon Stoll Bader & Nadler.

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