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Rating Action:

Moody's assigns a B3 rating to CIT Group Inc.

21 May 2010

New York, May 21, 2010 -- Moody's Investors Service assigned a B3 corporate family rating to CIT Group Inc. Concurrently, Moody's assigned ratings of B1, B3, and Caa1 to CIT's first lien secured debt facilities, second lien secured notes, and senior unsecured notes, respectively. The outlook for the ratings is stable.

The B3 corporate family rating incorporates the improvements to CIT's debt maturity profile and capital position that resulted from its fourth quarter 2009 pre-packaged bankruptcy reorganization. CIT recorded a significant gain in connection with the cancelation of indebtedness, boosting the company's capital levels and providing cushion for downside operating risks as the firm focuses on re-building its franchise. CIT has no meaningful scheduled debt maturities until January 2012, temporarily easing the burden on its developing but limited liquidity resources. In Moody's view, CIT's near-term default risk is relatively low as a consequence of its improved capital and liquidity positions.

The rating also recognizes the significant execution risks associated with CIT's long-term operating and funding strategies. CIT emerged from bankruptcy intending to build operating momentum on the basis of its historic competitive strengths in trade finance, transportation finance, vendor finance, and corporate finance. However, the continuing effects of previous customer attrition and liquidity constraints on origination volumes, margin compression from high funding costs, and asset quality weakness are challenges to the firm's revitalization efforts. CIT made progress repairing and expanding customer relationships and volumes in the first quarter of 2010. However, Moody's expects competitive conditions for both origination volumes and personnel will increase in the sectors traditionally served by CIT, as the financial services industry recovers and banks seek new opportunities for growth. In this regard, a particular CIT challenge involves overcoming the extra caution expressed by potential customers considering doing business with CIT, given CIT's uneven performance record and the availability of financing alternatives.

"CIT's brand equity has been bruised by the firm's difficulties over the past several quarters; it will take time for CIT to regain the confidence of customers, investors, and regulators," said Moody's senior analyst Mark Wasden.

Moody's believes that for CIT to remain a viable independent company, it must further its strategy of transitioning to a bank-centric operating and funding model. A significant obstacle to CIT's plans is a Cease & Desist order issued by the FDIC that limits the ability of CIT Bank to increase brokered deposits. Opportunities for CIT to fully take advantage of CIT Bank as a funding platform will be limited if the order is not lifted. It is uncertain when or under what conditions the FDIC will consider lifting the Cease & Desist order. A decision by the FDIC to remove the Cease & Desist order could have positive implications for CIT's ratings. However, a continuing additional concern for Moody's is that CIT bank -- in its current form as a single-branch entity offering primarily brokered deposits -- may prove to be of insufficient stature to be the basis for a long-term, resilient funding profile for CIT's bank-centric finance businesses; CIT's longer-term efforts to expand the strength and capacity of its bank are an element of its execution risk.

A further risk relates to CIT's reliance upon confidence-sensitive wholesale financing sources to procure funding not provided through CIT Bank. CIT has had some success this year reestablishing certain secured funding facilities that were terminated in 2009, but its ability to increase the breadth and stability of its funding from wholesale sources is uncertain given market conditions and the company's credit profile. CIT's strong cash balances and cash flows from asset sales and net portfolio runoff are expected to adequately provide for near-term liquidity needs. Moody's also expects that CIT will make progress repaying high cost debt during 2010, with consequential benefits to the company's operating margins and financial flexibility. However, CIT's liquidity profile will likely be characterized by constrained market access, limited liquidity alternatives, and relatively high funding costs for the foreseeable future, though low debt-repayment requirements mitigate these constraints near-term.

An important aspect of CIT's transformation centers on its efforts to build critical risk management capability to a satisfactory level. Under a Written Agreement with the Federal Reserve Bank of New York, CIT is required to, among other things, implement plans for strengthening risk management and oversight policies, capital and liquidity planning functions, and credit risk assessment and loss reserve methodologies. Moody's expects that CIT will continue to make progress on these high priority initiatives.

"We believe the necessary improvements CIT is making to its risk management infrastructure are beneficial to its credit profile, but there remain execution risks involving systems, processes, and people, " said Moody's Wasden.

Considering CIT's transition risks, Moody's believes that CIT's independence is not assured. Realistic alternate paths for CIT, such as a sale (in whole or in part) or select asset and business sales combined with portfolio servicing to liquidation, involve other potential operating and funding uncertainties that constrain the company's rating.

CIT's rating also considers the firm's earnings and profitability prospects. Moody's anticipates that accretion of fresh-start accounting (FSA) adjustments over the next few years will be a meaningful component of CIT's reported profits and will therefore also benefit the firm's reported capital levels. However, we expect CIT's pretax, pre-FSA earnings to be weak over the next several quarters, due to lower than historical volumes, high interest expense, and the need to provision for losses in a still difficult economic environment. An important measure of CIT's forward progress will be its asset quality performance, compared both to its historical trends as well as to expectations embedded in its FSA adjustments. A demonstration by CIT that it can sustainably produce high quality acceptable returns, in tandem with improved access to lower-cost funding, could lead to higher ratings.

The stable rating outlook is based upon Moody's expectation that CIT will continue its accelerated repayment of high cost first lien debt during 2010, thus aiding operating margins and improving financial flexibility. The stable outlook also reflects Moody's view that the demands on CIT's cash resources are manageable over the outlook horizon (12-18 months). This view is balanced by continuing uncertainties associated with CIT's longer-term funding model, franchise composition and positioning, and asset quality and earnings performance.

The B1 rating assigned to CIT's first lien loans is based upon strong asset coverage and loan terms, including a coverage covenant and cash sweep provisions, that support Moody's expectation that creditors would experience negligible loss severity in a default scenario. The B3 rating assigned to CIT's second lien notes is based upon their meaningful asset protections, though inferior to the first lien facilities, and the limited proportion of debt that is junior to the second lien notes. CIT's unsecured debt rating of Caa1 reflects the structural subordination of these notes to CIT's secured debt and their lengthy average maturity.

The principal methodology used in rating CIT is Analyzing the Credit Risks of Finance Companies, which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating these issuers can also be found in the Rating Methodologies sub-directory.

CIT Group, Inc. is a commercial finance company located in New York City and Livingston, New Jersey.

New York
Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns a B3 rating to CIT Group Inc.
No Related Data.
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