According to Moody’s, the upgrade recognizes CIT's achievements in strengthening its liquidity profile by diversifying funding sources, extending debt maturities, and reducing the level of encumbered assets.
To follow are highlights of the upgrade rationale:
In February 2012, CIT accelerated plans to redeem all $3.9 billion of remaining series A second lien notes following its successful offering of series C second lien notes in the amount of $3.25 billion. Once the series A notes are redeemed in March 2012, collateral fall-away provisions in CIT's series C notes ($14.0 billion outstanding) and senior line of credit ($2.0 billion commitment) take effect, resulting in these debts becoming unsecured. The ratio of secured debt to tangible gross assets will decline to 23% from 59% on a pro forma basis as a result of the redemption and collateral release, indicating an enhanced level of financial flexibility.
During the fourth quarter of 2011, CIT advanced its bank funding strategy by launching an online deposit platform, though which it raised $600 million in deposits through January 2012.
Total deposits at CIT Bank grew 44% in 2011, reaching $6.2 billion or 18% of total funding, improving CIT's funding diversification. Likewise, bank loan origination volumes grew during the year, accounting for 72% of total U.S. volumes in 2011. Nevertheless, the ultimate success of CIT's bank-like transformation remains uncertain, given its reliance on rate-sensitive brokered CD's, lack of product and channel diversification, and customers' limited brand awareness. The risks associated with this continued transition remain a constraint on CIT's ratings.
CIT has further extended its debt maturity profile, materially reducing near-term liquidity pressures and providing the company enhanced flexibility to execute its business transformation strategies. CIT has immaterial long-term debt maturities until 2014. Furthermore, it has extended the commitment for certain secured funding facilities to two years from one.
Also contributing to the upgrade, CIT's liability management efforts have led to a steady decline in its cost of funding, contributing to higher net finance margins. CIT's weighted average coupon on outstanding indebtedness declined materially to 4.71% in the fourth quarter of 2011 and to 4.28% on a pro forma basis including first quarter 2012 liability management actions. Net finance margin in the fourth quarter of 2011 reached 2.07%, adjusted for fresh-start accounting and debt prepayment penalties. Funding efficiency remains a key priority for CIT that could result in further reductions in funding costs and contribute to the sustainability of margin improvements.