Harvard Case - Oaktree and the Restructuring of CIT Group (A)
"Oaktree and the Restructuring of CIT Group (A)" Harvard business case study is written by Victoria Ivashina, David S. Scharfstein. It deals with the challenges in the field of Finance. The case study is 18 page(s) long and it was first published on : Oct 8, 2013
At Fern Fort University, we recommend Oaktree Capital Management proceed with the acquisition of CIT Group, focusing on a restructuring strategy that leverages Oaktree's expertise in distressed debt and asset management while addressing CIT's financial vulnerabilities. This strategy will involve a combination of debt restructuring, asset divestitures, and operational improvements to enhance profitability and create long-term shareholder value.
2. Background
The case study focuses on Oaktree Capital Management's potential acquisition of CIT Group, a struggling financial institution facing significant challenges due to the 2008 financial crisis. CIT Group's core business involved providing financing to middle-market companies, a sector heavily impacted by the economic downturn. This led to a decline in asset quality, increased loan delinquencies, and a significant reduction in market value. Oaktree, known for its expertise in distressed debt investing, saw an opportunity to acquire CIT and restructure it for profitability.
The key protagonists are:
- Oaktree Capital Management: A leading investment firm specializing in distressed debt and alternative investments, seeking to acquire CIT Group and restructure it for profitability.
- CIT Group: A struggling financial institution facing significant challenges due to the 2008 financial crisis, seeking a restructuring solution to regain financial stability.
3. Analysis of the Case Study
To analyze Oaktree's potential acquisition of CIT, we can utilize a framework that considers both financial and strategic aspects:
Financial Analysis:
- Financial Statements Analysis: A thorough analysis of CIT's financial statements reveals significant weaknesses, including high debt levels, declining profitability, and impaired asset quality. This highlights the need for aggressive restructuring measures.
- Capital Structure Analysis: CIT's capital structure was heavily reliant on debt, making it vulnerable to interest rate fluctuations and economic downturns. Oaktree's acquisition would likely involve restructuring the capital structure to reduce debt and improve financial flexibility.
- Valuation Methods: Oaktree needs to determine a fair acquisition price for CIT, considering its current market value, potential for restructuring, and future earnings prospects. This involves employing various valuation methods such as discounted cash flow analysis and comparable company analysis.
Strategic Analysis:
- Risk Assessment: Oaktree needs to assess the risks associated with acquiring CIT, including potential regulatory scrutiny, legal challenges, and ongoing economic uncertainty.
- Return on Investment (ROI): Oaktree needs to determine the potential return on investment from the acquisition, considering the restructuring costs, potential asset sales, and future profitability of CIT.
- Integration Strategy: Oaktree needs to develop a clear integration strategy for CIT, considering its existing operations, employees, and customer base. This involves streamlining operations, reducing redundancies, and leveraging Oaktree's expertise in asset management and distressed debt.
4. Recommendations
Oaktree should proceed with the acquisition of CIT, focusing on the following restructuring strategy:
- Debt Restructuring: Oaktree should negotiate with CIT's creditors to restructure existing debt obligations, potentially extending maturities, reducing interest rates, or converting debt into equity. This will reduce CIT's debt burden and improve its financial flexibility.
- Asset Divestitures: Oaktree should identify and divest non-core assets, including those with impaired value or those that do not align with CIT's future strategic direction. This will generate cash flow to reduce debt and invest in core businesses.
- Operational Improvements: Oaktree should implement operational improvements to streamline processes, reduce costs, and enhance efficiency. This could include automation, outsourcing, and activity-based costing to optimize resource allocation.
- Leveraging Oaktree's Expertise: Oaktree should utilize its expertise in distressed debt and asset management to maximize the value of CIT's assets, potentially through strategic partnerships or joint ventures.
- Focus on Core Business: Oaktree should focus CIT's operations on its core business of providing financing to middle-market companies, while potentially expanding into new markets or segments with strong growth potential.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Oaktree's expertise in distressed debt and asset management aligns perfectly with CIT's current challenges, providing a strong foundation for successful restructuring.
- External Customers and Internal Clients: Oaktree's restructuring strategy aims to improve CIT's financial stability and enhance its ability to serve its customers, ensuring long-term value creation.
- Competitors: Oaktree's acquisition and restructuring of CIT will position the company to compete effectively in the financial services industry, leveraging its expertise and resources.
- Attractiveness - Quantitative Measures: Oaktree's analysis of CIT's financial statements and market conditions suggests a strong potential for profitability and return on investment, justifying the acquisition.
6. Conclusion
Oaktree's acquisition of CIT presents a significant opportunity to create value through a strategic restructuring plan. By leveraging Oaktree's expertise in distressed debt and asset management, CIT can overcome its financial challenges, improve profitability, and regain its position as a leading provider of financing to middle-market companies.
7. Discussion
Alternatives:
- Liquidation: While liquidation could generate some cash flow, it would likely result in significant losses for creditors and shareholders.
- Government Bailout: A government bailout would be a costly solution with potential political and economic implications.
Risks and Key Assumptions:
- Economic Uncertainty: Continued economic downturn could impact CIT's ability to recover.
- Regulatory Scrutiny: Oaktree's acquisition and restructuring plan may face regulatory scrutiny.
- Integration Challenges: Integrating CIT's operations with Oaktree's existing businesses could pose challenges.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Acquisition and Restructuring | Potential for high ROI, leveraging Oaktree's expertise | High risk, potential integration challenges |
| Liquidation | Quick cash flow | Significant losses for creditors and shareholders |
| Government Bailout | Financial stability for CIT | Costly, potential political and economic implications |
8. Next Steps
To implement the recommended strategy, Oaktree should take the following steps:
Timeline:
- Month 1: Negotiate acquisition terms with CIT's management and board.
- Month 2: Conduct due diligence and finalize the acquisition agreement.
- Month 3: Announce the acquisition to the public and begin integration planning.
- Month 4-6: Implement debt restructuring, asset divestitures, and operational improvements.
- Month 7-12: Monitor progress and make adjustments as needed.
Key Milestones:
- Secure financing for the acquisition.
- Negotiate favorable terms with CIT's creditors.
- Identify and divest non-core assets.
- Implement operational improvements and cost reductions.
- Develop a clear integration strategy for CIT's operations.
By following these steps, Oaktree can successfully acquire and restructure CIT, creating long-term value for its shareholders and positioning CIT for future growth and profitability.
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Case Description
CIT's prepackaged bankruptcy marked the first time a major financial institution was able to successfully restructure and emerge from Chapter 11 bankruptcy, challenging conventional views that a financial firm could not survive bankruptcy proceedings as a going concern. A diverse group of private investors that had accumulated a large position in CIT in the period leading up to the restructuring played a central role in the success of this restructuring. The case protagonist is Rajath Shourie, Managing Director at Oaktree Capital Management. Shourie evaluates the opportunity to extend a $3 billion rescue credit facility to CIT, together with five other large creditors of the struggling bank. The decision takes place just one day after CIT was denied access to the Temporary Liquidity Guarantee Program (TLGP). This case provides a platform for discussing what constitutes a good attractive distressed target. (In parallel, students can gain in-depth insight into alternative financing models of corporate lenders, including banks and finance companies.) The second major component of the case concerns distressed debt investment strategies, and provides an illustration of turning an investment in public debt into a position of control over CIT's management and the restructuring process.
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