Although The CIT Group cranked up its ABS output in the first half of 2002 - exceeding all of its 2001 issuance - Chief Financial Officer Joe Leone has made it clear that CIT does not see itself as a "securitization company."
Furthermore, Leone said it will return to historically normal levels of issuance now that its IPO is complete and it is finally free of the beleaguered parent Tyco International.
"It's no secret that we lost some access to the [commercial paper] market, and we used our back-up liquidity - securitization - as an increased funding vehicle in the first six months of 2002," Leone said. "But we expect to be returning to our pre-2002 funding mix, with 15 % to 20% coming from securitization. In the first six months of 2002 it was about 25% of our funding."
CIT issued $5.4 billion of ABS paper in the first half of 2002, compared to $2.4 billion in the first half of 2001 and $4.5 billion in all of 2001. This issuance helped improve the company's capitalization ratios, and generally made the organization's balance sheet leaner and healthier in anticipation of its separation from Tyco. In the second quarter of 2002 alone, the stepped up securitization of assets contributed $57 million to CIT's bottom line. "From my perspective, it demonstrates an effective plan of diversified liquidity," Leone said.
After the IPO, Moody's Investors Service and Standard & Poor's immediately restored CIT's A1/P1 commercial paper rating, and CIT plans to tap that market soon for $3 billion to $5 billion, said Kathy Shanley, an analyst at GimmeCredit. This, in turn, should allow CIT to pull back on its securitization going forward. However, she cautioned that unfettered access to the CP market is not a foregone conclusion, and she also expressed concern about the quality of some of the assets. Charge-offs increased to $126 million in the second quarter from $112 million in the prior period, and CIT also has significant exposure to Argentina ($180 million), and the telecom sector ($700 million). However, Frank Garcia, senior vice president and assistant treasurer at CIT, who runs the securitization group with the aid of Barbara Callahan, vice president, noted that, "[the Argentine portfolio and the telecom portfolio] are not securitized and we never intended to securitize them."
These hair-raising credit exposures and its July IPO are just the latest turning points in an eventful few years for CIT Group. A stock market darling in the 1990s as a result of its rapid growth - partly attributable to its securitization program - CIT hit a big speed bump with its acquisition of Newcourt Capital in 1999, also a rapidly growing company. "Newcourt was a tough buy - it doubled their size," said Jennifer Scutti, an executive director at CIBC World Markets. "Newcourt had also been growing through acquisitions, and they did not have tight credit controls."
Exacerbating these lax credit controls was that Newcourt also exposed CIT - which had historically focused on financing middle market companies - to the more tumultuous retail financing (Dell Computer Corp., for example). Also, the new size of CIT made it "so big it started bumping up against the GE Capital(s) of the world, and it just didn't have the balance sheet to compete," Scutti said.
Therefore, when Tyco offered a 50% premium to the market value of CIT Group in the first quarter of 2001 - paying the majority stakeholder The Dai-Ichi Kangyo Bank in cash no less - there was little chance to resist the offer. Ironically, while the Tyco-CIT relationship was short and stormy, CIT was given the freedom "to restructure and recapitalize on Tyco's tab," Scutti said. "They're coming out of Tyco a whole lot stronger than they went into Tyco."
Going forward, Scutti sees CIT in an excellent position to take market share away from smaller competitors that have benefited from its recent distractions. CIT should be helped by lower funding costs and a restructuring that has lowered expenses, boosted margins, and increased productivity.
Agreeing with Scutti, Leone noted, "This whole market has been very hard on financial institutions without strong balance sheets." Additionally, Leone added that investors could have a difficult time digesting all of the paper from companies that depend largely on securitization. "Our diversified funding strategy, which utilizes both secured and unsecured debt, should help us increase market share."
Garcia predicted three to four equipment lease deals per year and an occasional home equity deal to "reinforce the program." As to whether the rash of deals earlier this year might dampen near-term investor interest, Garcia pointed out that the $2 billion of home equity loans issued in the first half is just a tiny part of the $60 billion home equity loan market. And, he predicted that interest would remain strong for its equipment lease paper, especially given the exit of competitors such as Heller Financial and Copelco Capital. "There's plenty of appetite for our two categories," Garcia said.
Despite CIT's resolve to decelerate its rate of securitization to pre-2002 levels, Leone was quick to highlight the commitment CIT has to a regular securitization program - not just for funding purposes but to prove to the market the quality of its assets. "We continue to like to demonstrate that the assets we put on the books have liquidity, and we like the discipline it encourages when a buyer is regularly going through our assets."
