CIT has become a customer to itself as to what it originally started as a "factoring company." It has become the government's sacrificial lamb of the commercial finance industry.
In its second quarter SEC filing, a 152 page event, "Funding and Liquidity Updates" takes three pages, page 42-45, and "Risk Factors" takes eight pages, page 83-93.
This is by no means a synopsis or even a "study," as the entire 152 page PDF follows for readers who want to take the time to read the filing in entirety. Here are excerpts, which the title aptly labels "baggage:"
"Given the accelerated economic downturn and its deepening impact on our customers and credit exposures, combined with our inability to make significant progress on lowering funding costs, we do not expect to return to profitability during 2009."
"The Credit Facility contains provisions (i) requiring the Company and the Steering Committee to work together in good faith to promptly develop a mutually acceptable restructuring plan for the Company and its Subsidiaries and (ii) requiring the Company to adopt a restructuring plan acceptable to the majority in number of the Steering Committee by October 1, 2009. The Company currently expects to complete development of and begin executing on the restructuring plan prior to October 1."
"In aerospace, we continued to perform well given the global economic recession. High lease rates, (negotiated during the peak of the cycle) have mitigated the impact of some industry softness primarily from certain Mexican airlines, whose passenger loads were impacted by health concerns resulting from the swine flu outbreak. At June 30, 2009, our commercial aircraft portfolio was fully utilized. For the remainder of the year we expect pressure on margin, reflecting softened lease rates on new deliveries and newly remarketed aircraft; and on asset sale gains, as continued illiquidity in the market impacts buyers and their ability to finance used aircraft."
"Rail continued to experience deteriorating lease rates and utilization. As leases expire, fewer cars are being renewed, and those that are renewed are done so at lower rates and periods. Keeping rail cars on lease continues to be a priority; we ended the second quarter at 91% utilization. We will continue to deploy a strategy where keeping cars on lease takes priority as we look to best positioning our cars for a market recovery and cycle turning point. Other income opportunities have been extremely limited as there is virtually no secondary market for discrete rail car sales. Also, our ability to scrap cars has been severely hampered due to lower scrap steel prices."
"On July 13, 2009, Microsoft Corporation notified CIT that they were terminating its vendor finance program agreement with the Company. Existing finance leases as of June 30, 2009 totaled approximately $649 million. The termination of the vendor finance program is not expected to have a material impact on the Company's net income for 2009."
"The Company does not include in the previous table unused cancelable lines of credit to customers in connection with select third-party vendor programs, which may be used solely to finance additional product purchases. These uncommitted lines of credit can be reduced or canceled by CIT at any time without notice. Management's experience indicates that customers related to vendor programs typically do not seek to exercise their entire available line of credit at any point in time. These lines of credit include vendor finance programs for Dell customers."
"Until December 31, 2007, CIT was a partner with Dell Inc. ("Dell") in Dell Financial Services L.P. ("DFS"), a joint venture that offered financing to Dell's customers. The joint venture provided Dell with financing and leasing capabilities that were complementary to its product offerings and provided CIT with a source of new financings. In December 2007, Dell exercised its right to buy CIT's interest and the Company sold its 30% ownership interest in the DFS joint venture. We maintain the right to provide 25% (of sales volume) funding to DFS in 2009. We also retain the vendor finance programs for Dell's customers in Canada and in more than 40 countries outside the United States that are not affected by Dell's purchase of our DFS interest. CIT has certain recourse to DFS on defaulted contracts. Financing and leasing assets related to the DFS program included in the CIT Consolidated Balance Sheet (but excluding certain related international receivables originated directly by CIT) were approximately $1.9 billion at June 30, 2009 and $2.2 billion at December 31, 2008. Securitized assets included in owned and securitized assets were approximately $0.1 billion at June 30, 2009 and $0.2 billion at December 31, 2008. CIT also has a joint venture arrangement with Snap-on Incorporated ("Snap-on") that has a similar business purpose and model to the DFS arrangement described above, including limited credit recourse on defaulted receivables. In July 2009, Snap-on notified CIT that it was terminating the joint venture agreement, which had been scheduled to terminate January 2010. Under the terms of the agreement, Snap-On will acquire CIT's interest in the joint venture for a payment of approximately $8 million and will continue to service the portfolio owned by CIT. The termination of the joint venture is not expected to have a material impact on CIT's origination volume, asset levels or net income prior to the first or second quarter of 2010. CIT and Snap-on have 50% ownership interests, 50% board of directors' representation, and share income and losses equally. The Snap-on joint venture is accounted for under the equity method and is not consolidated in CIT's financial statements. Financing and leasing assets were approximately $1.0 billion at both June 30, 2009 and December 31, 2008."
"Since December 2000, CIT has been a joint venture partner with Canadian Imperial Bank of Commerce ("CIBC") in an entity that is engaged in asset-based lending in Canada. Both CIT and CIBC have a 50% ownership interest in the joint venture, and share income and losses equally. This entity is not consolidated in CIT's financial statements and is accounted for under the equity method. CIT's investment in and loans to the joint venture were approximately $341 million at June 30, 2009 and $385 million at December 31, 2008."
"In the first quarter of 2007, the Company formed Care Investment Trust Inc. (Care), an externally managed real estate investment trust (RE1T), formed principally to invest in healthcare-related commercial real estate. In conjunction with a June 2007 IPO, CIT contributed approximately $280 million of loans to Care in return for cash and a 36% equity investment in Care, currently carried Item 1: Consolidated Financial Statements 31"
"CIT GROUP INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at approximately $62 million during the six months ended June 30, 2009, CIT recorded impairment charges of approximately $14 million. A subsidiary of CIT provides services to Care pursuant to a management agreement. The investment in Care is accounted for under the equity method, as CIT does not have a majority of the economics (expected losses and residual returns) in the entity."
"On July 16, 2009, the Lead Plaintiff filed a consolidated amended complaint alleging violations of the Securities Exchange Act of 1934 ("1934 Act") and the Securities Act of 1933 ("1933 Act"). Specifically, it is alleged that the Company, its CEO, its CFO, its former Vice Chairman, and its former Executive Vice President and Controller, violated Section 10(b) of the 1934 Act by allegedly making false and misleading statements and omissions regarding CIT's subprime home lending and student lending businesses. The allegations relating to the Company's student lending businesses are based upon the assertion that the Company failed to account in its financial statements or, in the case of the preferred stockholders, its registration statement and prospectus, for private student loans related to a helicopter pilot training school, which, it is alleged were highly unlikely to be repaid and should have been written off. The allegations relating to the Company's home lending business are based on the assertion that the Company failed to fully disclose the risks in the Company's portfolio of subprime loans. It also is alleged that its CEO, its CFO, its former Vice Chairman and its former Executive Vice President and Controller violated Section 20(a) of the 1934 Act as controlling persons of the Company. Lead Plaintiff also alleges that the Company, its CEO, its CFO and its former Executive Vice President and Controller and those Directors of the Company who signed the registration statement in connection with the October 2007 CIT-PrZ preferred offering violated Sections 11 and/or 12 of the 1933 Act by making false and misleading statements concerning the Company's student lending business as described above. It also is alleged that its CEO and its CFO, as well as the Directors who signed the registration statement, violated Section 15 of the 1933 Act as controlling persons of the Company."
"PILOT TRAINING SCHOOL BANKRUPTCY
Student LoanIn February 2008, a helicopter pilot training school filed for bankruptcy and ceased operating. Xpress, Inc. ("SLX"), a subsidiary of CIT engaged in the student lending business, had originated private (non-government guaranteed) loans to approximately 2,600 students of the school, which totaled approximately $196 8 million in principal and accrued interest as of December 31, 2007. SLX ceased originating new loans to students of this school in September 2007, but a majority of SLX's student borrowers had not completed their training when the school ceased operations. Collectability of the outstanding principal and interest on the balance of the loans will depend on a number of factors, including the student's current ability to repay the loan. Item 1: Consolidated Financial Statements 29"
"CIT GROUP INC. AND SUBSIDIARIES - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
After the school filed for bankruptcy, and ceased operations, SLX voluntarily placed those students who were in school at the time of the closure "in grace" such that no payments under their loans are required to be made and no interest on their loans is accruing, pending further notice. Lawsuits, including four putative class action lawsuits and one collective action, have been filed against SLX and other lenders alleging, among other things, violations of state consumer protection laws. In addition, several other attorneys who purport to represent student borrowers have threatened litigation if their clients do not receive relief with respect to their debts to SLX. SLX participated in mediation with several class counsels and the parties have made substantial progress towards a resolution of the student claims against SLX, and has completed a settlement of a mass action commenced by students in Georgia, which is binding upon 37 SLX borrowers. The Attorneys General of several states are reviewing the impact of the helicopter pilot training school's closure on the student borrowers and any possible role of SLX. SLX is cooperating in each of the Attorney General inquiries. Management believes the Company has good defenses in each of these pending and threatened matters and with respect to the Attorneys General inquiries. However, since the loans are unsecured and uncertainties exist regarding collection, management continues to attempt to resolve these matters as expeditiously as possible.
STUDENT LOAN INVESTIGATIONS
In connection with investigations into (i) the relationships between student lenders and the colleges and universities that recommend such lenders to their students, and (ii) the business practices of student lenders, CIT and/or SLX received requests for information from several state Attorneys General and several federal governmental agencies. In May, 2007, CIT entered into an Assurance of Discontinuance ("AOD") with the New York Attorney General ("NYAG"), pursuant to which CIT contributed $3 0 million into a fund established to educate students and their parents concerning student loans and agreed to cooperate with the NYAG's investigation, in exchange for which, the NYAG agreed to discontinue its investigation concerning certain alleged conduct by SLX. CIT is fully cooperating with the remaining investigations."
"RESERVE FUND INVESTMENT
At June 30, 2009, the Company had a remaining principal balance of $60 million (of an initial investment of $600 million) invested in the Reserve Primary Fund (the "Reserve Fund"), a money market fund. The Reserve Fund's net asset value fell below its stated value of $1.00 and the Reserve Fund currently is in orderly liquidation under the supervision of the Securities and Exchange Commission ("SEC"). In September 2008, the Company requested redemption, and received confirmation with respect to a 97% payout on a portion of the investment. As a result, the Company accrued a pretax charge of $18 million in the third quarter of 2008 representing the Company's estimate of loss based on the 97% partial payout confirmation."
"The weak economic environment is directly impacting our credit costs. The provision for credit losses, non-accrual accounts and charge-offs increased from the prior quarter. In light of these trends, year to date, we have increased our reserve for credit losses by $442 million. We expect non-accrual loans and charge-off levels to remain elevated through at least the remainder of 2009. The decline in interest margin slowed during the second quarter after compressing 25 basis points during the first quarter. The second quarter reflected lower interest expense on lower debt balances and somewhat better funding costs and yield-related fees, which were offset by termination fees on certain borrowing facilities and higher nonaccruals. We expect margins to remain under pressure from high non-accrual loan balances and other factors, including operating lease rental declines, increased cost of borrowings due to credit rating downgrades and recent funding arrangements."
"The Company has significant maturities of unsecured debt in both the near term and future years. Estimated unsecured debt funding needs for the twelve months ending June 30, 2010 total approximately $8 billion. In the second half of 2009, the Company has unsecured debt maturities of approximately $3 billion. Estimated secured facilities maturities (which are generally repaid in tandem with underlying receivable maturities) are $6 billion for the twelve months ending June 30, 2010 and $4.5 billion for the second half of 2009. There are two facilities with approximately $1.6 billion of availability at June 30, 2009 that is subject to renewal over the next six months. If the facilities are not renewed, the assets already held will remain outstanding and the obligations will be repaid out of the cash flows from the assets. In order to satisfy the Company's funding needs, the Company will need to extend debt maturities, or potentially sell assets to generate sufficient cash to retire the debt."
"As of June 30, 2009, CIT had U.S. federal net operating losses of approximately $5.5 billion which will expire beginning in 2027."
"The Company experienced higher draws on committed loan facilities, most notably during the week of July 13 - 17, which included draws of approximately $0.7 billion, about twice the normal activity. During the following week, the draws normalized and some repayments were received. During the same period, there was higher than normal requests for advances on factoring credit balances by customers in the Company's Trade Finance segment."
"The Company has significant maturities of unsecured debt in both the near term and future years. Estimated unsecured debt funding needs for the twelve months ending June 30, 2010 total approximately $8 billion. In the second half of 2009, the Company has unsecured debt maturities of approximately $3 billion. Estimated secured facilities maturities (which are generally repaid in tandem with underlying receivable maturities) are $6 billion for the twelve months ending June 30, 2010 and $4.5 billion for the second half of 2009. There are two facilities with approximately $1.6 billion of availability at June 30, 2009 that is subject to renewal in the next six months. If the facilities are not renewed, the assets already held will remain outstanding and the obligations will be repaid out of the cash flows from the assets. In order to satisfy the Company's funding needs, the Company will need to extend debt maturities, or potentially sell assets to generate sufficient cash to retire the debt."
Full Second Quarter SEC Filing (152 pages):
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CIT: The Facts
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