DBRS Downgrades CIT Group Inc. to BB (low), Remains Under Review Negative

DBRS has today downgraded the ratings of CIT Group Inc. and its related subsidiaries (CIT or the Company); including its Issuer and Long-Term Debt ratings to BB (low) from BB (high). Concurrently, the Company’s Short-Term Instruments rating has been downgraded to R-5 from R-4. All ratings remain Under Review with Negative Implications, where they were placed on April 24, 2009.

Today’s ratings action reflects DBRS’s view that CIT’s liquidity and funding profile continues to deteriorate and options to restore its liquidity position are becoming more limited. Moreover, today’s action reflects DBRS’s concern that CIT’s pressured liquidity position may damage the Company’s franchise in the long term. DBRS views CIT’s franchise strength a material factor underpinning the rating.

DBRS considers CIT’s liquidity and funding profile as under increasing pressure. The Company continues to await approval from the Federal Deposit Insurance Corporation (FDIC) to participate in the FDIC’s Temporary Liquidity Guarantee Program (TLGP). CIT is also awaiting additional waivers from the Federal Reserve under section 23A of the Banking Act. DBRS is also concerned that the Company’s ability to fund any significant increase in client draws on committed lines or other client demands for liquidity could be impacted should the near-term liquidity pressure not be solved in an expedient time frame.

Additionally, DBRS remains concerned that delays in receiving regulatory approval of such liquidity enhancing actions could result in CIT resorting to large asset sales and could require CIT to further curtail originations to meet its funding requirements. Asset sales and further reductions in originations could pressure CIT’s franchise. The current recessionary environment, reduced liquidity and uncertainty as to future funding options have negatively impacted CIT’s historically strong franchise.

Furthermore, DBRS is concerned that CIT may also look to other actions, such as debt exchanges, to reduce its outstanding obligations. While debt exchanges may be an efficient means to reduce debt levels, DBRS notes that it may view a debt exchange as a default, if the debt holders is adversely impacted or should DBRS view any exchange as coercive.

DBRS sees CIT prospects of attracting sufficient funding at reasonable terms as limited. However, DBRS recognized CIT’s recent success in obtaining alternate forms of liquidity, including its recently executed $954 million TALF eligible securitization. Liquidity has also benefited from the 23A waiver transactions, which created approximately $1.5 billion of liquidity at the bank holding company when CIT transferred $5.6 billion of government-guaranteed student loans and $3.5 billion of related debt to CIT Bank as part of its initial 23A waiver in April 2009. Additional 23A transactions, if approved, would add incremental liquidity, however, in DBRS’s view, the benefits may be reduced by the delay in receipt of and the size of any such approvals.

Today’s rating action also reflects DBRS’s view that CIT’s pressured financial profile and franchise will continue to be stressed by elevated credit costs. Additionally, the rating actions consider DBRS’s opinion that the Company’s earnings generation ability has been reduced by the aforementioned factors, as well as the revenue impact of the smaller balance sheet. DBRS is concerned that the lower net income before provisions comes at a time when solid revenues are required to absorb the elevated credit costs associated with this difficult credit cycle. The ongoing recessionary environment continues to impact the creditworthiness of CIT’s borrower base as well as the value of the collateral underlying the receivables, therefore, DBRS expects credit losses to increase and remain at elevated levels for the near to mid-term. Given these pressures, DBRS anticipates that it might take longer for CIT to return to profitability.

CIT’s capital base has been reduced by recent quarterly losses. Loss absorption ability remains limited, given CIT’s requirement to hold additional capital as part of its recent bank holding company conversion. CIT committed to a minimum level of total risk based capital of 13% of risk-weighted assets, while CIT Bank committed to maintaining for three years a Tier 1 leverage ratio of at least 15%. At the end of the first quarter of 2009, CIT’s total capital ratio was 13.1% and at the Bank level, the Tier 1 capital ratio was 15.0%. These ratios are very close to these committed regulatory levels and as such the Company has little capital cushion to absorb losses. CIT’s tangible common equity-to-tangible assets ratio declined to 4.8% from 5.6% at March 31, 2009, driven by the net loss for the quarter.

In its ongoing review, DBRS will monitor CIT’s progress in obtaining additional sources of funding. Moreover, DBRS will monitor any other actions the Company may take to bolster its liquidity profile. DBRS’s review will also focus on CIT’s ability to protect and restore its franchise, which in DBRS’s view will come under increasing pressure should the Company have to continue to further constrain origination volumes or increase asset sales. Moreover, sizeable losses from continuing operations may also be an indication that the Company’s franchise has been permanently weakened, which may lead to further negative ratings pressure.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is Corporate (Financial Institutions) rating.