CIT’s widely reported financial woes may result in its filing for bankruptcy protection. A CIT filing would present potential risks and challenges to any business with an interest rate swap or other derivative contract with the lender or its subsidiaries. Any company that has entered into such a derivative contract should evaluate its rights and obligations to ensure that its rights are fully protected in the event that CIT does file for bankruptcy protection. Collateral arrangements should be evaluated carefully, for example, and a company should review its derivative contracts generally to ensure, among other things, that it is not in default under any provisions of the contract.
A CIT bankruptcy filing may be an event of default with respect to CIT under its derivative contracts, giving the counterparty the right, but not the obligation, to terminate the contract. The Bankruptcy Code's "safe harbor" provisions may permit such a termination, notwithstanding the Bankruptcy Code's automatic stay. Companies may wish to weigh various considerations in determining whether to terminate, including the availability of a replacement swap. In addition, a counterparty that is out-of-the-money could be required to make a termination payment to CIT (which could be substantial), even if CIT is the defaulting party. In order to terminate the contract, the counterparty must comply with certain notice requirements, as well as value the terminated swap to establish the amount of the termination payment (whether payable by CIT or the counterparty).
The impact of a CIT bankruptcy filing on any particular counterparty would depend on the specifics of the party's derivative contracts and other agreements or relationships with CIT. The first step would be to identify any such agreements or relationships, so that the relevant agreements can be reviewed to determine the parties' rights, obligations, and available options.
The situation is developing rapidly.