CIT: Management Still Out of Touch with Reality

Nov. 2.09 | About: CIT Group (CIT)

I have been almost totally silent on CIT’s failure in this blog. The reason is that I believed it wasn’t appropriate to comment negatively on a competitor or its business. However, now that CIT has sought protection from its creditors I no longer feel that I must be silent.

Sunday at 3:48 PM I received an e-mail from CIT’s investor relations department that contained a press release from the company that is still making me shake my head in disbelief.

The 3:48 PM press release announced that CIT was filing Chapter 11, which isn’t a big surprise.

What was a big surprise is what they said about their leadership positions in various financing markets (which was their only comment on the actual business of CIT).

For more than 100 years, CIT has provided much needed capital to small business and middle market customers. These two sectors play a vital role in the U.S. economy and in overall employment and job creation, representing more than 90 million employees. CIT is the leading provider of financing to the retail sector and to women-, minority- and veteran-owned small businesses. Over one million customers depend on CIT to provide the financing needed to run their businesses. In addition to being one of the largest independent leasing companies in the U.S., CIT maintains the following leadership positions among others:

    • #1 factoring company in the U.S.;

    • 3rd largest railcar lessor in the U.S.; and

    • 3rd largest aircraft lessor in the world.

All of the language about CIT being a big lender to small business is true and a reason to try to save the company. It is well written and is the part of a company that even today has value. And, CIT is the #1 factoring company in the U.S. and scores of small businesses rely upon CIT to operate.

However, being a railcar lessor and an aircraft lessor is much different than being a small business lender and factor. Transportation equipment leasing is a game for companies with much more equity and much larger balance sheets than CIT.

In fact, it is hard to think of a more capital-intense equipment finance business than aircraft leasing. After all, there isn’t a lot of equipment (other than new cruise ships) that costs more than a 747 (or any other commercial aircraft for that matter). Even worse, there are few industries as cyclical as aviation which is why airlines are serial bankruptcy filers. Taking outsized bets on aircraft isn’t a business that a post bankruptcy CIT should be in given what will inevitably be its shrunken balance sheet and lower risk tolerance.

Railcar leasing isn’t as capital intensive or cyclical as aircraft but it is close. Most other financial services companies with similar divisions are pulling back on their commitments and trying to cut both pro-cyclical credit risk and size of their commitments. But apparently CIT’s management didn’t get the memo telling them that it is bad to make outsized bets on cyclical equipment for companies that can’t get financing directly in the capital markets.

Even worse, whoever wrote the press release and devised the business plan for the reorganized CIT didn’t realize that equipment leasing is a tax-driven business and since CIT isn’t a taxpayer (it takes earnings and profits to make a company a taxpayer, which CIT hasn’t had for some time) CIT shouldn’t be in the business. The tax benefits from leasing make the economics of large equipment leasing work for lessors and if CIT can’t use the tax benefits to offset large profits in other businesses it shouldn’t be in the leasing business. Since CIT won’t need to shelter large amounts of taxable income for years to come, it makes little sense for them to operate a large transportation equipment leasing company.

While I am sure that the management team and Board of CIT is working very hard and means well, I think that they still appear to lack certain basic fundamental understandings of their business. But then again, if they were competent at their jobs, CIT wouldn’t have filed Chapter 11 and a 100 year old company wouldn’t be on the verge of extinction.