CIT Group CEO Presents at Barclays Global Financial Services Conference (Transcript)

Sep.10.13 | About: CIT Group (CIT)

CIT Group (NYSE:CIT)

Presentation at Barclays Global Financial Services Conference

September 10, 2013 9:00 a.m. ET

Executives

John Thain - Chairman and CEO

Scott Parker - CFO

Analysts

None

Unidentified Speaker

Good morning, thank you for joining us. I’m very pleased to have the team from CIT with us this morning. I’m not sure they need introductions, but I’ll do a very quick one. We have both John Thain and Scott Parker, the CEO and CFO respectively.

I’m sure most of you are very familiar with John’s background. He joined CIT as the CEO in 2010. Prior to that, he was CEO of Merrill Lynch, then NYSE, and also very senior at Goldman Sachs. Scott joined around the same time to be the CFO after spending a lot of time at GE.

So with that, I’ll hand it over to John. We look forward to your comments.

John Thain

Thank you, Mark. Good morning everyone. Thank you all for being here this morning and thank you to Barclays for inviting us to present today.

For all of you speed readers, please read this quickly. Thank you.

As you heard, I’m joined by Scott Parker, our CFO, and this is our agenda for today’s presentation. First, I’ll provide an overview of CIT and our priorities. And I’ll also review our commercial businesses with a focus on our opportunities for growth. And then I’ll update you on the progress we’re making in building CIT Bank.

And then Scott will provide a financial update during which he’ll focus on how we’re meeting our financial targets and update you on our tax position, our deposit strategy, and our capital framework.

For those of you who are less familiar with CIT, let me just give you a quick overview of the company. We’re a 105-year-old company. We were founded in 1908. We became a bank holding company in 2008. We’re a commercial lender and lessor, primarily to small and middle market companies and to the transportation sector.

One of the attractions of our businesses is that we generate high-yielding assets and we manage our credit risk with collateral. Our servicing capability is another differentiating characteristic in most of our asset classes. We’ve got a market capitalization around $10 billion. We have significant excess capital and we’re very liquid.

To show you our portfolio, you can see from this slide our $35 billion portfolio of loans and leases spreads across five business segments. Our largest segment is transportation finance, in which we are a leading lessor of airplanes globally and rail cars in North America, and we also provide financing to related transportation industries.

Our corporate finance business is a $9 billion portfolio. We’re a leading lender into the middle market, where we make both asset secured and cash flow loans. Our vendor finance business provides financing primarily to small and middle sized companies for their essential use equipment, largely office equipment and telecom equipment.

And in trade finance, which is a high-turnover business, we are the leading [factor] in the United States, with an annual volume of about $25 billion, where we help finance companies primarily in the retail sector.

And lastly, our consumer segment is a portfolio of $3.5 billion of government guaranteed student loans, which we’re in the process of running off.

We’re often asked what differentiates us from other commercial lenders, and how we compete against banks, and there are several factors. First, we have very long term client relationships. We have clients who have been a CIT for 20 to 30 years, particularly in the trade finance and the vendor finance businesses, and we have very strong sponsor relationships in corporate finance. And I’ll give you an example of that later in the presentation.

Second, we understand our clients’ businesses. We specialize in certain industries and sub-industry groups for which we have deep understanding and market knowledge, and we tend to do more complex financings.

Our deals tend to be somewhat smaller than those that the larger banks focus on, and our financings typically require considerable amounts of structuring related to the collateral. We pride ourselves on delivering on our commitments in a timely manner, and we have high-quality servicing and portfolio management teams.

So here are our current priorities. We want to continue to prudently grow our assets, both organically and through opportunistic portfolio purchases. We want to continue to achieve our profit targets. As Scott will talk about later, we’re currently meeting our pre-tax ROA target. We want to continue to expand CIT Bank, both on the asset side and on the deposit side. And we want to both deploy and return capital.

I’ll now review each segment and talk about the growth opportunities that we see. Our corporate finance business lends to small and middle-market companies. It’s primarily a U.S. business, although we do do some business in Canada and Europe. We make senior secured loans, and have a fairly even split between asset-secured lending and cash flow loans.

We’re organized by industry, and we have industry segments including industrials, energy, retail, and restaurants, healthcare, communications, and entertainment. We’re focused on growing organically through our deal pipeline, and our funded volume has averaged around a billion dollars a quarter over the last eight quarters.

We have strong relationships with private equity sponsors, and we’re focused on winning more agency [rolls]. And we relaunched our equipment finance and commercial real estate businesses where we see considerable opportunities for growth.

So here’s a good example of how we’ve built a relationship with a private equity sponsor, Odyssey Partners, over the last 10 years. Since 2011, CIT has provided financing to eight different Odyssey portfolio companies, both for acquisitions as well as for growth needs of their existing investments.

We’ve been able to support Odyssey and its portfolio companies across many of their industry groups, including commercial and industrial, transportation, healthcare, and energy. And in our most recent transaction, CIT was the sole arranger and lead book runner on an ABL facility for Odyssey that enabled them to acquire Cross County, which is a leading equipment rental company servicing the pipeline construction industry. CIT underwrote the deal and successfully syndicated it, bringing in new lenders to the credit.

As I said, we reentered the real estate finance business in late 2011, with a team that we hired from the Bank of Ireland. The portfolio is almost $1.2 billion, and as demonstrated on this slide, is diversified by product type, by geography and by sector. About a third of the portfolio is financed construction, which includes renovations, while the remainder provides financing to existing income producing properties.

We describe our focus as being on the northeast corridor and other 24-hour cities. You can see that over 50% of our exposure spans from Boston to DC, and the remainder is spread across other large cities. We have a good balance of exposure by type of property financed, between condos, offices, retail, and a small amount of hotels. And the picture on the slide is one of two properties recently financed with [Clarington] Partners, and let me describe that transaction in more detail.

Clarington Properties is a privately owned international property company based in Ireland, with a well-established presence in the U.S., the U.K., and Germany. Their focus is on city center and urban retail and office transactions.

Their prior lender recently pulled out of the market and they needed quick execution to finance two properties in Boston. One of them is a retail property, and the second one is a combination of retail and office space. CIT was able to leverage our market knowledge and meet Clarington’s needs. We provided two senior secured loans totaling $76.5 million to refinance these two properties.

The other business that we relaunched is equipment finance, in which we provide financing against specific equipment, generally essential use equipment in manufacturing and industrial industries. The portfolio today is around $600 million. We have both good diversification by industry and by type of equipment finance, and let me give you an example.

Mesilla Valley Transportation is one of the largest locally owned transportation providers in western Texas and southern New Mexico. They needed access to financing to acquire $20 million in new replacement tractors and trailers. We won a competitive process, which included some other existing lenders. We structured amortizing term loans guaranteed by the company, and provided expedited closing.

Moving to trade finance, we are the leading factor in North America, with an experienced management team and an extensive retail credit database. We provide working capital financing and other services to thousands of manufacturers and importers through factoring their receivables. In other words, we buy the receivables when they ship their goods to retailers.

We’re focused on growing by adding clients, expanding beyond apparel, and capturing more of the international trade flows, particularly those coming from Asia. As you can see from the slide, currently almost half of our factoring volume comes from the apparel segment. We’re focused on expanding the factoring business into other segments like textiles, home furnishings, and other consumer products.

In our transportation finance business, we have a leading market position in both the air and rail leasing markets, and we relaunched maritime finance earlier this year, and I’ll provide some more details on the maritime financing in a moment.

Our value proposition revolves around our industry expertise, maintaining an attractive fleet with strong utilization and being an asset manager with the skills to navigate through multiple market cycles. Our focus is to maintain our leadership position in the leasing market while also prudently growing our loan portfolio, levering CIT Bank through transportation lending, business air, and then maritime.

Our commercial air portfolio continues to perform well, and reflects our strong asset management capabilities and the relationships we have, both with the manufacturers and with the operators. Utilization is a key driver and we maintain a high quality, diverse fleet, and we actively manage the portfolio.

We focus on aircraft with broad operator appeal and invest and divest opportunistically. And we seek to minimize the asset risk by focusing on in-demand assets, maintaining a young fleet, and limiting both client and country exposures. As you can see on the slide, our commercial aircraft today is 100% utilized.

We have a forward order book of 161 aircraft, which gives us a baseline for growth. We’ve placed almost all of our forward order deliveries over the next 12 months, and we manage the order book to meet our customers’ future needs. Our order book not only has the latest technology and in-demand aircraft, but it also seeks to diversify risk by aircraft type, manufacturer, and year of delivery.

The rail leasing business has been showing very favorable overall industry trends, and we proactively order new rail cars that will improve our competitive position. Utilization rates have improved over the last few years, as have lease rates. We’re currently running around 98% utilization, and the strongest sectors have been related to energy, particularly for fracking. Our order book maintains alignment with the long term commodity demand trends and provides clients with newer and cost-efficient assets.

We reentered the maritime financial market about a year ago. We now have a team of seven professionals dedicated to this sector. We’ve had an opportunity to enter this market after many established players left. Asset values had declined dramatically, and deals were being done today with very conservative loan to values.

Year to date, we’ve closed six transactions. We have several more in progress, and a growing pipeline that includes opportunities across a variety of asset types. We’ve provided an example here of one of our more recent financings. Sterling Ocean Shipping Financing was formed by Alterna Capital Partners, which is a U.S. based private equity firm for which shipping is one of their core sectors.

CIT provided $61.8 million of financing for new energy efficient tankers that Alterna commissioned under a long term charter with Stena Weco, a leading shipper of chemicals. The transaction represents CIT’s third transaction with Alterna, the first two involving financing a portion of the construction costs and later the delivered costs of a chemical tanker operating in U.S. waters.

Our fourth commercial segment is vendor finance, where we partner with manufacturers and dealers of essential use equipment - mainly telephones, computers, and copiers, which is the backbone of any company - and we provide financing and leasing options to the end users. Our value proposition revolves around longstanding vendor and dealer relationships, expertise and understanding the needs of the end users to provide innovative financing solutions and services, and then proven asset management of the residuals.

We have a presence in five regions, the U.S., Canada, Europe, Latin America, and Asia, and almost new U.S. business is being originated in CIT Bank. We’re currently in the process of transforming this business to enhance its profitability and growth.

As we transform this business for further success, we’re realigning our focus from being a global customer-based model to a country-based model. Historically, we’ve relied on partnerships with a few large, global, customers that operated in multiple countries, and as a result we focused on specific industries: technology, telecom, and office products.

As some of these global vendors have developed their own captive financing arms, or they rely on local financing companies, we felt it was prudent to expand our relationship and products and services in countries where we have scale and to exit certain countries in which we did not have sufficient scale. So, while we’re preserving the fundamentals and value proposition of the business, we’re looking to reposition it for further profitability and growth.

Now let me conclude my part of the presentation by talking a little bit about CIT Bank. As you can see here, the growth in commercial assets in the bank, which now represent over 30% of CIT’s total commercial assets. CIT Bank is well-positioned for future growth. We continue to grow the commercial portfolio.

Essentially all new U.S. loans and leases that are being originated by corporate finance and vendor finance are in CIT Bank, and in transportation finance, most of the new loans are being originated in the bank , as well as almost all the new rail car deliveries.

The bank has the capacity for this growth. It’s very liquid. It has around $2.5 billion of cash at the end of the second quarter, and it has excess capital. Our risk-based capital ratios are all around 20% in the bank.

So to summarize, CIT is well-positioned for continued success. Our business franchises are strong, and are performing well. We’ve achieved our strategic milestones, most recently the launch of our share buyback, and our financial position is strong. We’re achieving our return on asset targets, and we’re very optimistic about our prospects going forward.

With that, I’ll turn it over to Scott.

Scott Parker

Thank you, John, and good morning everyone. We continue to make progress on our strategic initiatives. Balance sheet restructuring has decreased our cost of funds. We continue our disciplined underwriting and portfolio management. And as John just mentioned, in the second quarter we announced the share buyback.

Our financial position is strong, as you can see here. Our commercial lending and leasing assets continue to grow. Our liquidity remains strong, both at the bank and the bank holding company, and our capital levels are amongst the highest in the industry.

John mentioned that we continue to achieve the target range for our pretax income at 2% to 2.5% return on assets. On net finance margin, we have a target range of 3.5% to 4.5%, and as I have mentioned many times, this has been elevated due to some items such as suspended depreciation and interest recoveries.

I want to let you know that the first phase of the Dell Europe sale happened in the third quarter, which will reduce the benefit from the suspended depreciation in the third quarter and fourth quarter by about 25 basis points. That will be offset by corresponding reduction in the impairment line in non-spread. I know that’s one of the remaining confusions in our financial statements.

We also, as I mentioned, in the second quarter we’ve seen a lower level of interest recoveries, which added about 10 basis points in the second quarter and we expect that to continue to decline in the second half of the year.

Credit metrics continue to be at cyclical lows. Core other income remains stable and in line with recent trends over the last few quarters. We have been very active on our portfolio management activities, as John mentioned, particularly in our transportation business, and we expect to see a slowdown of that going forward given the actions we’ve taken the past year.

Operating expenses are moving in the right direction. We’ve taken several actions earlier in the year and also starting to see the benefit as it came through in the second quarter. Again, we continue to focus on growing our assets and reducing cost to generate operating leverage in our business.

I’d like to go through the different profitability drivers that we have, starting with net finance margin. As you can see here, this is about 450 basis points for the second quarter. Our cost of funds has continued to decline, but at a slower pace, as we are getting most of the benefit now from our funding cost in the bank.

Our core yields have remained stable over the period, and the changes over the last few quarters really have been noncore activities, or items such as interest recoveries, a little bit of FSA, and other yield-related fees.

As I just mentioned, our margin has been elevated a little bit from suspended depreciation, which is an accounting phenomenon related to our Dell portfolio that we have held for sale. However, as you know, that does not impact our overall pretax income, because of the offsetting item in non-spread in the impairment line.

So we sold about a third of the portfolio in the third quarter, and expect the remaining to be sold in the fourth quarter. As that happens, you’ll see the benefit in the margin line of suspended depreciation decline, and a corresponding decline in non-spread.

We’ve experienced, the last couple of quarters, a high level of interest recoveries and yield-related fees, mainly due to the refinancing activity in the marketplace. As a result, we do see that our net finance margin will gravitate over the next couple of quarters, down to probably the midpoint of around 4%.

On non-spread revenue, if you go back historically, a lot of that has been volatile, because of a lot of the portfolio actions we did in regard to selling assets to pay down high-cost debt. In addition, as we talked about, the Dell portfolio had an impairment charge that went through non-spread on a reported basis. So those were items that we expect to decline in the second half of the year.

With respect to non-spread and core fees going forward, you’ve seen in the second quarter that we did have some underwriting syndication fees that came from the efforts we’ve had in our corporate finance business of rebuilding the franchise. We feel very good about the level of those fees, but again, those tend to be variable based on the transactions, and is not something that’s going to repeat each quarter in the same amount. But we are comfortable with our improvement on the lease positions we’ve been getting.

In addition, I think in regard to the portfolio management, specifically related to gain on equipment leasing sales, we like the portfolio we have in our aircraft business, and we will continue to do proactive risk management. But the level of gains may come down over the next couple of quarters.

Just thought I’d give you a little bit of update on the operating expense initiatives. As I try to depict here, we’ve made a lot of progress in regards to our cost initiatives. A lot of the efforts relate to taking actions both on headcount - and you’ve seen our headcount go down. We’ve modified some of our benefit plans, so that kind of comes in on a quarterly basis. We have reduced the level of third party or consultants that we’ve used as we have made progress on building the bank infrastructure as well as the bank holding company infrastructure.

And as John mentioned, really a lot of our effort right now is exiting some of the subscale platform and countries as well as product lines that do not meet our return hurdles. I mentioned in the second quarter we did sell a few platforms. We have a few others that we made progress on in the third quarter, and some of those will also tail into the fourth quarter. We also moved a portfolio of noncore assets into held for sale in the second quarter, and expect to have those exited over the next couple of quarters.

We also have additional activities and actions that are going to be announced over the remainder of 2013, to position us to get to the run rate operating expenses, about $215 million per quarter as we enter 2014.

So we think the combination of the cost reduction efforts, as well as the growth in our assets, will provide us the operating leverage to get into the range of 2-2.5, and I would expect that we’re going to be at the higher end of that range as we enter 2014 and will continue to focus on expenses to improve on that as a percentage of average earning assets.

The next big topic that I thought I’d cover - I mentioned it a little bit when we did a previous conference in June - but there’s really two concepts, one an economic concept, the other one is an accounting concept.

So on the economic side, we do have a large NOL in the U.S. It’s about $5 billion. Currently, when you look at our tax provision on our GAAP results, the majority of that provision is for international earnings as well as some state taxes. From an economic point of view, the focus is on generating U.S. taxable income so we can offset those profits against the NOL, which would reduce the valuation allowance commensurate with those earnings.

And just for those that may not know, from a taxable income point of view the big difference on our U.S. GAAP profitability and taxable income is that our operating lease portfolio has accelerated depreciation, so that difference between book and tax is one of the items that has shown that we’ve been profitable on a GAAP basis and modestly profitable on a tax basis. But all of our efforts are focused on utilizing the NOL and generating the U.S. taxable income to provide that to the bottom line.

Moving on to the right hand side, is really the concept of valuation allowance. So in addition to the valuation allowance, we do have deferred tax liabilities that offset the deferred tax asset we have on our books. That asset is about $1.6 billion at the end of the second quarter, and with respect to to that, the technical viewpoint is when and how do you evaluate the valuation allowance?

There’s many criteria that go through. The first one is really a three-year cumulative normalized book earnings profitability and also future forecast. And so as we have some of the years of improved profitability, that will be an item that is the first trigger point. And then there’s also other criteria that I won’t go through this morning, that you have to assess to validate whether you have enough justification to reverse the valuation allowance.

So as we go, we’re really focused the left-hand side, which is utilizing the NOL and generating U.S. taxable income, and if it’s deemed that the valuation allowance cannot be justified or supported, and needs to be reversed, that would be an item that goes forward in future quarters.

This is a chart we use a lot, to kind of show you the transition and the progress we’ve made on the funding side. You see over the last couple of years the cost of debt has come down significantly. The mix of funding has diversified, with a greater proportion of the deposit funding. And this gives us a lot of flexibility in regards to our debt maturity stacks, and in regard to access to the capital markets.

As you saw after the earnings call that we did in the second quarter, we did issue a $750 million unsecured debt issuance in the marketplace for 10 years. We were very focused on growing the deposit funding in our bank, which I’ll talk about a little bit in a couple of slides, but also another key item is how do we refinance or repay the debt maturities we have coming due in 2014 and 2015.

There’s about a total of $2.8 billion of maturities in 2014 and 2015, with an average cost of about 5%, and we think we’re going to address that through a combination of the cash generation at the bank holding company as more assets are funded in the bank. Part of these portfolio management activities that we’ve moved assets into held for sale, as well as we’ll have some new debt issuance.

So in addition to the deposit funding, which is really going to be the driver for 2013, as you get into 2014 and 2015, the additional improvement in cost of funds will be what’s the mix between cash used versus debt issuance to redeem the $2.8 billion of debt maturities.

I thought I’d just give you a little bit of a sense of kind of the funding in our bank. We have been very successful in growing our internet deposits, as we’ve talked about many times. We feel good about where we are, and I wanted to take you through a couple of components of how we think about the funding in the bank.

Our deposit strategy is designed both to try to have our deposits grow commensurate with our asset growth, but also a really important tenet is how do we use it for our asset liability management.

So as you see on this chart, savings as well as short term term CDs really are the primary focus for our shorter duration assets, and for some of our longer-lived assets, particularly rail car and some of the aircraft loans and marine loans, we’ve used the brokered CD market in order to get duration.

Over the last couple of quarters, this has really helped improve the margins in the business that we’re funding in the bank, and also ensures that we have the appropriate balance between our duration of our portfolio as well as our liability structure.

As you can see on this chart, we’ve kind of made some actions in the short term, or the short end of the curve. We kind of did reduce our rates on our savings account in some of our short term CDs, and that was in line with what the market was doing.

You also see on this chart that given some of the movement in the 10-year treasury that has increased the cost of some of our brokered CDs in regard to the longer duration, but given the asset yields, we still think it’s prudent to continue to issue at those rates and to match fund those assets. Overall, the continued growth in the deposit base will be based on our asset growth as well as continue to diversify and broaden our funding sources.

Now I want to move on to capital. I used this chart, and I know it’s kind of simple, but I think it’s one that - again, there’s many concepts out there for everybody. I know we can talk a little bit about what that means.

The framework really is, we have three different kind of areas. One, when we look at our economic capital framework, we look at our portfolio as an investment grade credit, and do our analysis based on how much capital we need to set aside for our portfolio based on that rating. And that gets to us about 12% risk-weighted assets.

As part of becoming a bank holding company, we have an agreement with the regulators to have a 13% risk-weighted capital commitment, so in our view they’re pretty close to each other. And then the last element has been during 2012 we spent a lot of time on our stress testing and trying to get our standards up to others in the banking industry, and we spent a long time and a lot of effort on that and how to use a lot of internal scenarios for that.

So we feel really good about where we are from a perspective of evaluating our portfolio both on an economic capital point of view, on a regulatory capital point of view, and then the additional element of stress testing. But our primary focus right now is really to get down to our target capital ratio for the firm, whether that’s 12% or 13%. And then once we get to that point, we can look at opportunities for additional improvement in our capital structure, which would be mainly some non-equity type of capital that we could put in the capital structure.

So everybody knows that we have excess capital, as we’ve talked about. If you look at our target capital ratio of 13%, it’s about $2 billion. About half of that, as John mentioned, is in the bank, and we’re using that as the bank grows. The other piece is at the holding company, that again we want to continue to grow our commercial franchise, and so if there are opportunities to meet the return hurdles for the business, we would love to deploy that capital. I think that’s the most efficient way to do that.

And in the second quarter, we did announce a share buyback. And we think that we’re making progress. Since the earnings call, we’ve made progress on that share repurchase. And we do believe that even with the growth rates that we’re looking at, that there is additional room for capital returns, and we’ve stated that we would like to do that both in the form of share repurchases as well as dividends, in line with some of the regulatory guidelines in the industry.

With respect to the timing, and that form of the capital return, we have to take into consideration many factors. One is going to be our go-forward earnings, some of the regulatory guidelines, the economic environment that we foresee for the next few years, our enterprise value, as well as other considerations that will impact the timing and the amount of such capital returns.

So in closing, hopefully listening to John you can see how our commercial franchises have continued to build great relationships with our customers, and the type of transactions that we’re doing and that we’re prudently growing the portfolio, both from an organic point of view - we’ve had a bunch of new initiatives that we have had great success with - as well as we opportunistically look at portfolio acquisitions as another alternative to growing the portfolio.

We are currently meeting our targets for pretax ROA, and we are focused on reducing our operating expenses to give us the leverage that we want in our portfolio. The bank continues to expand both from an asset point of view as well as diversification of the funding, and our cost of funds in the bank are very competitive. As we mentioned at the end, we have started buying back our shares and we look for future capital allocation discussions going forward.

With that, I’d like to turn it over to Mark, who’d like to have a quick survey for you to engage in.

Question-and-Answer Session

Unidentified Speaker

Yeah, thanks. So we’ve got a few questions for the audience. Those of you interested in participating please grab your handheld devices in front of you.

First question, what do you think is the biggest catalyst for CIT shares over the next year: 1) accelerating asset growth, 2) expense reduction, 3) increasing share buybacks, or 4) M&A?

All right, so it’s close. The number one, at 37%, was accelerating asset growth, followed by increasing share buybacks at 31%, and M&A at 27%. Not much focus on expense reduction.

Next question, what methodology do you rely on most for valuing CIT: 1) price to book, 2) price to adjusted book, 3) price to normalized earnings, or 4) DCF?

All right, so it’s very close, between price to adjusted book and price to normalized earnings. Not much focus on price to book.

Next question, over the next six to 12 months, what do you expect will happen to your exposure to CIT: 1) increase, 2) maintain, 3) decrease, or 4) remain uninvolved?

So for those of you who are involved, which is about two-thirds of the audience, slightly more increase than maintain their positions.

So with that, I think we’ve got time for one question from the audience. Management will be hosting a breakout after this.

Unidentified Audience Member

Just hoping for some additional commentary on your intentions with the maritime finance growth. I know I’ve heard a lot of commentary from other financial institutions globally about how challenging that market is, particularly on a risk-adjusted basis. So just wondering how you quantify your entry into that space on a risk-adjusted basis. How do you think about collateral, which I know a lot of people say is very challenging to claim, if something goes wrong? And I guess what’s your ambition in terms of size, scale, and total size of that business?

John Thain

So first of all, the opportunity in the marketplace I think is driven a lot by the difficulties that other financial institutions have had in that market. So we’ve seen a lot of the lenders, particularly international lenders, pull out of that market. Asset values are much, much lower right now. And charter rates on many of the assets are very low.

The way that we look at this, and on a risk-adjusted basis how we get comfortable, is first of all, our lending against relatively low loan to values, against asset values that are already very low. So just to give you an idea, the example I showed you, loan to value on that loan was 63%. And again, those are against assets that are already depressed in value.

The second thing we do to protect ourselves is we are lending against an asset that typically has a long term charter with a very high quality credit. And so we really look to get the ship on a long term charter where we can be very comfortable with the credit quality of the charter. And that also gives us a lot of protection in terms of the loan.

You’re absolutely right that we’re not really very excited about trying to foreclose on the collateral and take ships back, but we do, because we do this in our aircraft business and in our rail car business, have the capability to do that, and we’re very conscious of the fact that if we need to, we will in fact take them back.

One of the nice things about rail cars and airplanes and ships is that if people don’t pay us, we can in fact get the asset back. And so we do have the capability to do that.

Unidentified Speaker

Okay, great. We’re going to have to conclude with that.

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