CIT Group: Non-Performing Franchisee Loan Data Needed

In looking at CIT's last few earnings calls, its Feb 2009 investor presentation (theme: challenges, opportunity, making progress), and press coverage, what is unclear is the breakout and amount of the non-performing loans.

The 2009 CIT backup documents showed "retail" at only 7% of the portfolio.

It's long been noted in franchisee sectors (see www.blumaumau.org, CIT discussion threads) that lenders' cash flow projections and SBA business projections have been/are contrived, are way too optimistic.

Of course, the same is true of a lot of big M&A deals, too. Chain restaurant M&A deals were in a 6 to 7 EV/EBITDA multiple range forever (1980 to 2005) but then spiked to 9-11 range in 2005-2007. The recent highs were, interestingly, the Dunkin Donuts deal, valued at 12.8 x (in 2005) and Krispy Kreme, at 21.4 x (in 2008). Both of these companies are franchisors, have had recent franchisee failure (3 multi-unit Dunkin franchisees in the last 45 days have filed for Chapter 11 reorganization. See here.)

What proportion of CIT's non-performing loans are chain franchisees? The publicly traded franchisors rarely refer to franchisee success metrics in their disclosures. This information could go a long way to highlighting the policy debate, e.g., CIT really is Main Street America and should be saved.

Disclosure: No stock positions whatsoever.

Comments

[User 443149:]

If CIT were saved, that would do more damage to Main Street America. The cost of capital that CIT would charge its remaining clients will be prohibitive. Think about this: the average rate on CIT's receivables in 1Q09 was 4.89%, while the cost of debt for CIT is north of 18%. Even well capitalized financials can't borrow much below 5% in the 5-yr part of the curve. CIT is a relic from a by-gone era (just like 10x deal multiples for restaurants). Its clients, i.e. Main Street America, would be better served by financials with access to lower cost, diversified funding sources.

Jul 17 08:07 AM

[wturner145:]

Obumba's tax increases, borrowing like a fool, with foreign countries tired of their "borrowed money" at risk spell more doom for companies like this one. American reminds me of a dope addict with a credit card maxed out.

Jul 18 09:23 AM

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