Why Doesn't CIT Announce "No Bankruptcy"? (3 Suggestions)

When a firm has good news, it usually can't wait to get it off its chest in the fastest, most concise and, well, bluntest form possible. That is, unless, if you are the executives at the top of CIT Group.

Bankruptcy Speculation
In the past few weeks, CIT has become a speculative bankruptcy target, after the firm faced a massive liquidity crisis in July. Forced to look elsewhere for money to bridge the lender's immediate commitments, CIT execs went to key investors (mainly hedge funds), who agreed to provide an additional $3 billion in financing at the Alpine-steep rate of 10% over LIBOR. That, according to the company's management, was enough to stave off the necessity of filing for bankruptcy protection.

But the $3 billion came with a catch: the money could not be used to pay off an immediate $1 billion in commitments from bonds maturing in August, unless a tender offer by the firm was accepted with 90 percent approval by the bondholders.

Late last week, CIT announced that its subsidiary CIT Trade Finance, which gives cash advances and credit to manufacturers and retailers, would get $1 billion of the $3 billion raised at the end of last month.

Then, earlier today, the firm said that it has resolved a tender offer to buy back the $1 billion of debt maturing this month, by raising the purchase price of the bonds to 87.5 cents on the dollar vs. 82.5 cents previously. It also said that it only needed a 58 percent tender approval for the notes, and that 65 percent of note holders had already tendered.

Given that the original terms of the deal with the investors who provided the $3 billion stipulated that should CIT receive a higher-than-required percentage of tendered notes, it would not file for Chapter 11, it doesn't take a leap of common sense to work out that the lender is no longer going bankrupt. (It would also be rather odd for the firm to start apportioning slices of its recent $3 billion investment, right before announcing bankruptcy.)

3 Reasons Not To Announce "No Bankruptcy"
So why then doesn't CIT just come right out with it and announce that it's not going bust? After all, the company could easily raise another $800 million in equity if it did so, based on the firm's pre-bankruptcy-speculation market value of $1.2 billion.

There seem to be three possible answers to this question right now:

• The terms of the agreement with the bondholders now allow for the lender to file for bankruptcy protection, and the company is just being shy in admitting it. But that's very unlikely, if not outright fraudulent.
• The firm is entering into an agreement to be bought out, or to sell off substantial bits and pieces of key assets to previous bidders such as Berkshire Hathaway. Rumors of a potential takeover by JP Morgan or Goldman Sachs have been circulating since the company's stock went into freefall three weeks ago. This is the most likely reason, since any substantial rise in the share price might fudge a sale agreement.
• The firm is doing everything to avoid making statements which will potentially land it in trouble with the SEC for being false or misleading. That idea is especially compelling in light of the regulator's indictment of Bank of America today for its handling of the Merrill Lynch buyout last year.