Cash Management

Liquidity on Tap at CIT Group

The financing company moves forward with bold plans to stay liquid and nimble into 2009.
Marie LeoneApril 17, 2008

Commercial finance giant CIT Group moved forward with plans to increase liquidity, announcing that it will sell off assets and shrink its balance sheet over the next year.

Company executives said on Thursday that CIT had agreed to sell $4.6 billion of asset-based loan commitments and $770 million worth of aircraft, and that it was exploring the possibility of shedding its $4 billion rail-leasing business. Furthermore, they said an additional $2 billion in assets have been identified to be sold or financed to help the company maintain acceptable liquidity levels into 2009.

The announcement, made during a conference call, follows CIT’s March 20 revelation that it would borrow $7.3 billion from about 40 U.S. banks to repay commercial paper and other debt maturing in 2008 and provide financing to its core commercial franchises. These steps, combined with the company’s existing cash balance of $10.3 billion, “materially enhance the company’s liquidity and significantly advance its plan to reduce the size of the balance sheet,” noted CIT chairman and CEO Jeffrey Peek. The company’s cash position has increased by 34 percent to $6.8 billion since last quarter.

During the first three months of the fiscal year, CIT raised $10.6 billion of financing, including the draw-down on the 40 bank lines, $2.7 billion of asset-backed financing, and $600 million of unsecured retail notes. Asset-backed financing — secured by rail assets, middle-market loans, trade finance receivables, student loans, and mortgages — included $2.2 billion of on-balance-sheet secured borrowings and $500 million of off-balance sheet securitization transactions.

The group used cash during the quarter to help bolster its liquidity. For example, cash was used to pay $1.5 billion of maturing commercial paper and $1.6 billion of maturing debt. In addition, $1.7 billion was used to fund portfolio growth, and $1 billion was used to reduce credit balances in factoring clients. CIT also had $50 billion of “unencumbered” assets, which is still available for use in asset financing, noted chief financial officer Joseph Leone. “Managing down … of the balance sheet [this quarter] should help improve ratios,” added the CFO.

The company also reported a first-quarter net loss of $257 million, or $1.35 per share, noting that commercial segment earnings — which include its corporate finance activity — were more than offset by a combination net loss in the company’s home lending and consumer lending segments, including defaults in the student loan business. Early this month, CIT announced it would cease originating government-guaranteed student loans.

Further, CIT took a $148 million pre-tax, non-cash charge related to hedge accounting. Currently, when a transaction qualifies for hedge accounting under FAS 133, Accounting for Derivative instruments and Hedging Activities, gains and losses on derivatives can be deferred until they mature. Leone explained that the company was forced to stop using hedge accounting when it converted floating interest rate swaps, that were used to hedge its commercial paper program, to fixed-rate instruments. This was done to fund fixed-rate assets with terms similar to the swaps. The associated loss was tied to declines in market interest rates since the inception of the swaps. However, the loss had been previously reflected in other comprehensive income, and therefore had a “negligible impact on shareholder equity,” said Leone.

Other measures the company will take to strengthen liquidity is the funding of $335 million of first-quarter commercial loan originations through the Utah-based CIT Bank, an industrial loan company with more than $1.4 billion in total assets. ILCs have been the subject of controversy because the institutions can be owned by non-financial companies. Currently, a wide range of companies own ILCs, including General Motors, Target, Nordstrom, and Harley-Davidson, as well as UBS, Merrill Lynch, Morgan Stanley, and CIT.

The company also eliminated 500 jobs, or 8 percent of its global workforce, which is a deeper cut than the 5 percent it had previously forecast. CIT also expects to cut 150 more employees from its student loan business during the second quarter, and will likely record a $20 million pre-tax charge related to closing the origination portion of that unit — although CIT will continue servicing existing loans.

The company will also slash its dividend by 60 percent, to $0.10 per share. That move should return $100 million in capital savings for the year, “and ultimately lead to shareholder value,” noted Leone. In the end, Leone said that the company has been successful in “tapping into the pockets of liquidity” across the entire group.

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