Oaktree and the Restructuring of CIT Group (A) Custom Case Solution & Analysis

1. Evidence Brief: Case Researcher

Financial Metrics

• CIT Group status: Bank holding company with $71 billion in assets (Exhibit 1).
• Liquidity crisis: $10 billion in debt maturities due in 2009 (Paragraph 4).
• Oaktree position: Purchased $1.5 billion of CIT debt at significant discounts, aiming for equity conversion (Paragraph 12).
• Capital injection: CIT sought $2-3 billion in emergency liquidity to avoid bankruptcy (Paragraph 8).

Operational Facts

• Primary business: Small and mid-market commercial lending (Paragraph 2).
• Regulatory status: Converted to Bank Holding Company in Dec 2008 to access TARP and Fed liquidity (Paragraph 5).
• Constraints: FDIC oversight and strict capital adequacy requirements (Paragraph 9).

Stakeholder Positions

• CIT Management (John Thain): Focused on survival via debt exchange and government support (Paragraph 15).
• Oaktree (Howard Marks/Bruce Karsh): Distressed debt investors seeking control through restructuring (Paragraph 14).
• Federal Regulators (FDIC/Fed): Reluctant to provide further TARP support; prioritized systemic stability over equity holder protection (Paragraph 11).

Information Gaps

• Exact recovery rates for various debt tranches in a liquidation scenario.
• Degree of internal resistance from existing CIT equity holders to dilution.

2. Strategic Analysis: Strategic Analyst

Core Strategic Question

• How does Oaktree force a restructuring that maximizes the recovery of its $1.5 billion debt position while navigating the conflicting mandates of federal regulators and incumbent management?

Structural Analysis

• Bargaining Power of Regulators: The FDIC holds the ultimate veto. If the restructuring does not satisfy capital adequacy, the bank enters receivership, wiping out Oaktree.
• Distressed Debt Dynamics: CIT is a classic liquidity-insolvency hybrid. Oaktree must ensure the debt-for-equity swap is viewed as a reorganization, not a liquidation.

Strategic Options

• Option 1: The Pre-Packaged Bankruptcy. Force a court-supervised process. Trade-off: High speed and legal certainty, but risks losing the bank charter and destroying franchise value.
• Option 2: Negotiated Out-of-Court Exchange. Pressure management to accept a massive dilution. Trade-off: Avoids bankruptcy stigma but requires unanimous or near-unanimous creditor consent, which is difficult to coordinate.
• Option 3: Strategic Equity Infusion. Provide new capital alongside the exchange. Trade-off: Requires fresh cash, but secures control and aligns interests with regulators.

Preliminary Recommendation

• Option 3 is the only viable path. Oaktree must lead a new capital injection to satisfy the Fed, using that leverage to dictate terms of the debt-for-equity swap.

3. Implementation Roadmap: Operations and Implementation Planner

Critical Path

• Step 1: Secure a non-disclosure agreement with CIT management to access non-public liquidity projections.
• Step 2: Present the capital injection term sheet to the FDIC to ensure regulatory alignment before approaching other creditors.
• Step 3: Execute the exchange offer with a threshold trigger (e.g., 90% participation) to minimize holdout risk.

Key Constraints

• Regulatory Approval: Any plan requires the Fed to view the bank as viable post-restructuring.
• Creditor Coordination: Fragmented debt ownership creates potential for holdout litigation.

Risk-Adjusted Strategy

• Maintain a secondary plan for Chapter 11 filing if the exchange offer reaches less than 85% participation. This provides a credible threat to force holdouts to the table.

4. Executive Review and BLUF: Executive Critic

BLUF

Oaktree must pivot from passive creditor to active sponsor. The current strategy relies too heavily on management cooperation. Oaktree should immediately formalize a capital injection group. By providing the liquidity the Fed demands, Oaktree gains the only seat at the table that matters: the one that decides the bank's survival. If the Board rejects the infusion, Oaktree must move for a pre-packaged Chapter 11 filing within 30 days. The risk is not the bankruptcy; the risk is the slow decay of asset value under current management. Oaktree has the capital and the mandate to replace the Board. Use it.

Dangerous Assumption

The analysis assumes management is a rational actor. Management is currently protecting its own equity position and career survival, which is fundamentally at odds with a deep-dilution restructuring.

Unaddressed Risks

• Systemic Contagion: Regulators may choose to liquidate CIT to set a market example, regardless of Oaktree's proposal.
• Asset Quality Decay: The underlying loan book may deteriorate faster than the restructuring timeline allows.

Unconsidered Alternative

A partial sale of the loan portfolio to a third-party bank, using the proceeds to pay down senior debt and reduce the total capital gap, thereby simplifying the restructuring of the remaining entity.

Verdict: APPROVED FOR LEADERSHIP REVIEW