Capital Markets

Repairs to CIT Only Part-way Done

Borrowing and asset sales boost the balance sheet, but liquidity remains the chief concern for the commercial finance company's CFO.
Vincent RyanJuly 17, 2008

Struggling CIT Group reported a steep drop in operating income for the second quarter, but said it has done significant repair to its balance sheet and is now positioned to meet liquidity needs through the end of 2009. Still, the company faces $6.2 billion in maturing debt in the second half and continuing interest expenses from outstanding debt of its discontinued home lending operation.

The company ended the second quarter with $7.5 billion of unrestricted cash and $2.2 billion available under securitization facilities. “We made tremendous strides in the quarter on the balance sheet,” said CFO Joseph Leone, “in the most difficult environment I have ever seen. Our liquidity runway has been extended in a very robust way.”

During the quarter, CIT raised $1.6 billion through a common and preferred stock sale and sold $2 billion of assets. It also secured a $3 billion facility from Goldman Sachs to finance asset-backed securities originated by CIT, and secured financing to take delivery on $1.5 billion in new aircraft for one of its leasing businesses.

CIT also repaid $5.6 billion of unsecured term debt and commercial paper in the quarter.

Still, CIT continues to work through liquidity issues arising mainly from the deterioration of its mortgage financing business. While the company sold its home lending and manufactured housing portfolios in early July — after incurring a $2.1 billion loss in the second quarter — there is still work to do on the liabilities that those businesses created, explained Leone.

“We sold home lending at a discount to book, but the cash from the sale did not pay down all of the allocated debt,” he said. With $3 billion of debt remaining, that leaves interest expense of $43 million that has to be covered by the rest of the operation, Leone said.

During the second quarter, CIT’s income was also reduced by $15 million in net interest costs as a result of maintaining higher-than-average cash balances and investing those balances in low-risk assets. Leone called it a “large negative carry.”

The company has $4.1 billion in unsecured debt and $2.1 billion in credit facilities due in the second half of 2008, as well as $8.02 billion in bonds and loans due in 2009, according to a Bloomberg News report.

CIT chief executive Jeffrey Peak said the company is continuing to explore “a full range of options” for its rail transportation leasing business — including a potential disposal. CIT has no plans to access the unsecured debt markets, although it hopes to get there eventually.

In late May Moody’s Investors Service dropped CIT’s senior unsecured debt rating from A3 to Baa1 and left the financing company’s long-term ratings on review for possible downgrade.

CIT protested at the time, “particularly in light of the significant progress we have made to strengthen our balance sheet, improve liquidity, and position CIT for long-term success and profitability,” the company said in a statement.

CIT reported a second-quarter loss of $2.07 billion before preferred dividends, or $7.88 a share, compared with a loss of $127 million, or $.70, a year earlier. Net income income from continuing operations fell to $48.1 million, or $0.12 per share, from $352.1 million, or $1.76 per share, for the comparable 2007 quarter.

Besides the loss from the sale of its home lending unit, other one-time items impacting CIT’s results included a $60 million increase to reserve for credit losses, a $17 million restructuring charge, and $69.1 million to exit some real estate deals.