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Global Credit Research - 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
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.
Mark L. Wasden
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Moody's assigns a B3 rating to CIT Group Inc.
Financial Institutions Group
Moody's Investors Service
No Related Data.
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