CIT Group: From 'Near Death' to 'Critical'

Leasing News issued the press release from the CIT Group (CIT) announcing the $3 billion underwriting from Goldman Sachs as an “Extra” last Monday. Generally, we prefer to look at the “spin” first. It looked like very good news to this editor, and it still may be, but Leasing News didn’t know. Several attempts to reach the CFO or a “spokesman” went unheeded. Leasing News is not the New York Times and often our news comes from insiders, so that is the approach that we took.

The first set of questions that were asked were to confirm what the agreement provides:

1. It appears it is $300 million max a year?
2. Based on 3 month LIBOR (looks like adjustable then, and can float?) If this is viewed similar to an adjustable mortgage, the terms is 3 months, or the 3 month rate for the entire term of the borrowing?
3. Verify that a security rating changes, rate changes?
4. Looks like some control over what collateral is sold to raise additional funds?
5. As in factoring, sometimes you take the best deal offered, and this appears to be very timely? (CIT started out in the factoring business.)

An issue more of curiosity than really fitting the Goldman Sachs deal is, are the airplane commitments available for sale and/or may they be converted?

If CIT wasn’t going to answer some of the questions we asked, we knew where to turn: to CIT competitors.

What we did was send a copy of the SEC filing and the CIT Press release to company Presidents, Executive Vice-Presidents and CFOs of some the same size, some larger and some smaller, who would understand the agreement and be able to “interpret it.”

The caveat was reading the SEC filing; their comment could be “on the record” or “off the record.”

Only one said “on,” but many did respond “off the record.”

After most of them were received, the responses were sent to the CIT public relations contact, hoping to get a response from the CFO who signed the SEC posting, but at press time, Leasing News has still not heard from the CIT Group about the real cost of the deal with Goldman Sachs International.

Here are some responses that Leasing News did receive:

 

“Its the right deal for now, but I believe the outlook has only gone from near death to critical.”

 

 

"If CIT goes under, it hurts all of us in the industry in more ways than it could possibly benefit us."

 

This from the SEC filing (the highlights in bold are the responses from the sender/editor):

 

CFL will pay GSI an annual facility fee of 2.85% on the Maximum Facility Amount. Amounts financed under the facility will bear the additional cost of 3-month LIBOR. In the event that CFL exercises its right to terminate the Facility early, CFL will be required to pay GSI a make whole amount equal to the discounted present value of the facility fee for the remaining term of the Facility. There are no additional upfront commitment, underwriting or structuring fees payable to GSI or any of its affiliates on the Facility. Subject to concentration limits, the securities included in the Facility may be backed by commercial loans, equipment contracts, FFELP student loans, aircraft or rail leases, private student loans or other assets other than home mortgage loans. The amount financed by the Facility will be equal to the initial market value of the ABS included in the Facility reduced by an agreed upon discount percentage. As part of the mark to market adjustment, the discount percentage will be increased in the event that the rating on any particular security is downgraded below specified levels. After the seventh year of the facility, GSI may increase the discount percentage provided that the facility fee and financing spread shall be simultaneously reduced. The portfolio will be marked to market on a daily basis by GSI and to the extent, if any, that the market value (less the relevant discount percentages) differs from the amount then financed under the Facility, CFL or GSI will be required to post additional collateral.

 

In my opinion this is the bugaboo. The rate is LIBOR plus the fee of 2.85% ON $3 BILLION. Sucks if you take down $1 billion, in which case fee would be 10% and you pay LIBOR too. That’s ok, until you realize they aren’t getting 100% financing of their crap. BIG ISSUE, is it 99% or 85%? Still means much equity is needed by CIT. 

It's apples and oranges total pricing.

1. Cheap money! 3 month LIBOR. PLUS:
2. Annual fee, seems like it is around 3% of 3B or 90 million per year. A ******** big fee!

SO: if they borrow the whole 3B, they effectively have to pay LIBOR (2.7%) plus fee (90 mil or 2.85% of borrowing) total rate 5.5% (good enough, depends on advance rate).

If they borrow half, they pay LIBOR plus the whole 90 mil fee effectively around 7% combined all in rate, still not bad... BUT...

If the advance rate is (say) 85% that’s less attractive

AND ...it seems that the paper will then be sold into the capital markets. if the capital markets rate is, say, 14% effective, I believe CIT bears the 14% rate not less.

It’s a good deal for a company otherwise dead. Still, it will be a tightrope that entirely depends on capital markets embracing this paper, and it seems from what we know so far that GS is NOT standing behind the paper in the markets NOR capping their rate. It seems GS is saying "at some price however painful to CIT we will guarantee some deal gets done and help in the meantime by lending. (I haven’t enough detail to bet my car on it however)

I do not believe the risk is LIBOR pricing. The risk is: what if the capital markets continue to have securitizations and demand s**t pricing. How does this help CIT which needs to earn a spread between implicit rates on leases and loans, and implicit borrowing costs? I would like CIT to explain away that risk. If they cannot, they have bought time awaiting a securitization window that may never come.

By the way, securitizations are great, they do not provide abnormally cheap capital. No firm can be a securitizer exclusively and win without huge equity, good luck, and being PRIVATELY held. Even then its a bogus strategy.

Well, let’s think about this for a second. "Securities based financing" seems to mean that Goldman is not providing capital but is (apparently firmly) underwriting capital markets deals for CIT such as securitizations. What would the terms of such offerings be? Does CIT have protection on its ultimate cost of funds or will it be driven by what the market will bear? Can CIT therefore be sure of a spread between the paper it writes and the cost of its funds?

I think some skepticism is in order. CIT has relied on capital markets access to be in business, the capital markets were closed to it and others. GS is a wonderful firm to pry those markets open again, but cannot possibly be standing behind a low cost of funds. Hence: how does CIT compete with banks that have ample funds on which they pay a deposit interest rate?

These arguments of mine become less true in businesses with a proven slight margin increase in returns, such as smaller ticket or rental. I can imagine a small ticket lessor borrowing money and earning some spread. By the way, since CIT announced their aircraft intentions that market has gone from bad to hell.

Said Joel S. Kress, Executive Vice President of ICON Capital Corp.:

 

We think that it is great that CIT was able to secure this financing.  It is another milestone that CIT has achieved in order to facilitate bringing about its health and we wish them continued success as the industry needs financing professionals and capacity that CIT brings to the marketplace.

 

Comments

[Yo Bob:]

The aggregate amount financed at any one time during the first ten (10) years of the Facility will not exceed $3 billion, with such amount to be reduced by $300 million per year for each of the following ten years (the "Maximum Facility Amount").

2008 Jun 23 09:17 AM

[PIPE AL:]

HOPE CIT DOES NOT REPEAT THE SITUATION TYCO WENT THROUGH, THEY WERE PART OF THEM FOR A TIME. IF THEY TRY TO SELL THE RAILCAR FLEET AT SAME TIME AS GE, LOOK OUT. BARGAIN SALES MUCH LESS RETURNS TO SELLERS. GE FLEET PROBABLY 6 BILLION DOLLAR PLUS. CIT ? 4 BILLION OR SO.

2008 Jun 23 12:30 PM