CIT will be required to pay Goldman Sachs $1 billion if it were to file for Chapter 11 bankruptcy
Goldman Sachs is in negotiations with CIT Group about potentially amending a $3 billion loan to CIT – reported Reuters.
The Wall Street Journal reported that, under terms of the loan, CIT will be required to pay Goldman Sachs $1 billion if it were to file for Chapter 11 bankruptcy. CIT is considering different options for the loan, including reducing the $1 billion payment.
Goldman Sachs, in a press release, said: “Goldman Sachs is working with CIT and its creditors to enable it to continue to use the facility, which we believe gives it an attractive cost of funding, particularly relative to the other financing that has been provided to CIT at less attractive levels.”
According to a regulatory filing, Goldman extended $3 billion in funding to CIT in June 2008. The 20-year contract, which was set as the credit markets froze, calls for CIT to pay Goldman 2.85% of the maximum amount lent.
The source revealed that this would translate to around $85.5 million a year for the first 10 years of the agreement, and CIT is required to pay $1 billion if it were to file for Chapter 11 bankruptcy. CIT pays around 10% interest on its latest loan.
According to a Goldman Sachs internal memo, the financing for CIT required the bank to establish long-term funding of its own, which it is obligated to pay even if the CIT facility is paid off early or CIT files for bankruptcy. The $1 billion payment is designed to cover Goldman Sachs in such an event.
New York-based CIT received $2.3 billion in federal bailout funds last fall and in July 2009 secured a $3 billion emergency loan from some of its largest bondholders, dodging an immediate bankruptcy filing. But the company still needs to reduce its massive debt burden to avoid collapse, reported the press.