CIT Beats Estimates, Thain Plans to Refinance Debt

CIT Group Inc., the commercial lender run by Chief Executive Officer John A. Thain, posted its second straight quarterly profit since emerging from bankruptcy and said the firm will repay or refinance $4 billion of debt.

Second-quarter net income was $142.1 million, or 71 cents a diluted share, according to a statement today from New York- based CIT. That beat the 36-cent average estimate of five analysts surveyed by Bloomberg, adjusted for one-time items. Results aren’t directly comparable with those before CIT’s bankruptcy reorganization.

CIT’s turnaround may get a boost this week as the company starts talks to refinance about $3 billion of high-cost debt with lower rates and less-restrictive conditions. Some of CIT’s obligations carried interest rates of 13 percent. The company retired $3 billion of debt during the quarter and expects to repay about $1 billion more before refinancing.

“There is an opportunity today to do it on attractive terms,” said Thain, who disclosed the plan during an earnings conference call today. Bank of America Corp., Deutsche Bank AG and Morgan Stanley will hold a meeting July 29 in New York to market the five-year loan, according to people familiar with the transaction. CIT spokesman Curt Ritter declined to comment.

CIT’s book value, the difference between its liabilities and its assets, increased 48 cents a share to $43.11, compared with an increase of 64 cents in the first quarter.

Share Reaction

CIT fell 84 cents, or 2.2 percent, to $38.16 at 4:15 p.m. in New York Stock Exchange composite trading. The shares advanced 38 percent this year. The firm sought court protection in 2009 after clients defaulted and investors shunned its commercial paper.

“The mantra is, beat earnings and pay down debt,” said analyst Henry J. Coffey Jr., of Birmingham, Alabama-based brokerage Stern Agee & Leach Inc., before today’s announcement. In the first quarter, the lender reported a surprise profit, aided by accounting gains tied to early repayments from borrowers. Coffey rates CIT “buy.”

Second-quarter results were lifted by $407 million of pretax benefits tied to the bankruptcy accounting, according to the statement. Gains on sales of assets and recoveries of charged-off receivables more than compensated for a higher provision for credit losses and the cost of an employee- retention program.

Shrinking the Company

Total assets declined $3.1 billion to $54.9 billion as the company sold holdings and collected on loans.

“We improved our funding flexibility, repaid higher cost debt, streamlined our portfolio and largely completed the build-out of our senior management team,” Thain said in the statement.

Thain, who was named CEO in February, has been shrinking the company and wants to replace CIT’s reliance on capital markets with less-expensive sources of funds, such as bank deposits. He’s been asking regulators to lift curbs that prevent CIT from tapping certain types of deposits.

One impediment to winning approval from agencies such as the Federal Reserve Bank of New York is the need for CIT to upgrade its risk controls, Thain said.

“Many of the Fed’s issues with us have to do with risk-management systems and information systems,” Thain said. “The time-frame to get the systems in order is going to be at least 12 months.”

Earnings Impact

The deficiencies are also a drag on profits, he said. CIT “will probably carry what will look like relatively high amounts of cash” until executives are “comfortable” with the systems, Thain said. The cost of the remedies is one reason CIT’s rising ratio of expenses to assets “will be an issue for us for at least a little while,” he said.

CIT previously disclosed at least four financing facilities this year through which investors have provided more than $2 billion for certain types of lending, such as equipment loans. The trade finance unit’s loss narrowed and attrition of customers eased, the statement said.

Small- and medium-size companies that are CIT’s core customers remain reluctant to use their credit lines amid a weak economy, Thain said. “They are being very cautious,” he said. “They are not drawing on the lines. They are not hiring people. They are not spending money on plant, property and equipment.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE