DBRS Corrects CIT Group Inc. Press Release and Assigns Additional Rating

This announcement corrects the version issued on May 17, 2010. In the first paragraph, it was incorrectly stated that the Unsecured Long-Term Debt rating of B applied to the Series A Notes. In fact, DBRS has assigned a rating of B (high) to the Series A Notes. The corrected text is as follows:

DBRS has today assigned various ratings including an Issuer Rating of B (high) to CIT Group Inc. (CIT or the Company). Concurrently, DBRS has assigned a BB (high) rating to CIT”s First Lien Secured Credit Facility, a BB (low) rating to the second lien Series B Notes, a B (high) rating to the Series A Notes, a B rating to the Unsecured Long-Term Debt and a Short-Term rating of R-4. The trend on all long-term ratings is Positive.

The Issuer rating considers CIT’s solid and well-diversified core commercial lending franchise, the strengthened balance sheet, and CIT’s near-term liquidity position. However, offsetting these positives are the significant challenges the Company faces including further diversifying and improving the funding profile, restoring underlying profitability, and improving the core franchise while reducing balance sheet size.

Important to the rating, CIT’s core commercial lending franchise remains solid. DBRS sees little evidence of erosion of core businesses owed to the reorganization process completed in the fall of 2009. Indeed, CIT continues to maintain top tier market positions in trade finance, transportation finance and vendor finance. Further, going forward, DBRS expects that CIT’s more stabilized condition and improving funding profile will allow management to focus on restoring positive momentum in its core-businesses.

The ratings consider CIT’s progress in improving its liquidity profile; however, more work is needed in diversifying funding while reducing the cost of funding. Since the beginning of the year, CIT has executed a number of secured financings and disposed of two business lines generating additional liquidity. To this end, the Company has reduced its first lien credit facility by $2.25 billion since the beginning of the year. By reducing this facility, CIT not only improves leverage, but importantly improves profitability prospects. CIT has no material maturities of debt until 2013. DBRS expects continued progress on executing additional liquidity enhancing projects in the upcoming quarters. CIT intends to shift its funding model to a more “bank-centric” model and reduce reliance on wholesale funding sources. DBRS views this as a longer-term challenge, further complicated by the restrictions placed on CIT’s bank subsidiary, which remains under a C&D order from the FDIC. As such, resolving regulatory concerns is necessary to the Company moving forward with its funding strategy. Success in achieving transformation of the funding profile will be viewed positively and could ultimately lead to upward rating momentum.

The ratings consider the weak underlying earnings, which are largely the result of the high cost debt in the capital structure. Net earnings however, benefit from fresh start accounting. To this end, CIT’s first quarter net income of $97.3 million was bolstered by $421 million of pre-tax fresh start accounting accretion income. Margins to average earning assets were 4.09% for 1Q10, however excluding fresh start accretion, finance margins declined to a very low 0.65%. CIT’s success in repaying or refinancing the high cost debt will greatly assist the Company’s undertaking of returning to a reasonable level of profitability.

Asset quality remains acceptable, given the point in the cycle. Underlying credit performance in the pre-emergence book of business indicates stabilization. Importantly, credit risk has benefited from fresh start accounting, as assets, including the Company’s loan book, were marked to fair value on December, 31, 2009. Accordingly, in the legacy portfolio, CIT only has exposure to further deterioration since the date of marking. Nonetheless, credit risk remains owed to the Company’s exposure to small and middle market companies and the still uncertain economic recovery. However, the remaining $1.6 billion of non-accretable discount (marks) on the balance sheet as of March 31, 2010 limits potential exposure to losses on the pre-emergence loan portfolio. The reorganization process strengthened the balance sheet. Leverage has been reduced with debt-to-equity of 4.9x. Regulatory capital remains well-above requirements. CIT reported a Tier 1 capital of 15.5% and total capital ratio of 15.9% at the end of 1Q10.

Consistent with DBRS’ methodology for rating secured instruments, DBRS rates the First Lien Credit Facility three notches above the Issuer Rating. The notching reflects DBRS’ view that recovery, in the case of default, will be greater than 90%. The high-recovery postulation considers the overall quality of the assets and the values of the assets have been marked-to-fair value as part of the fresh start accounting. Indeed at March 30, 2010, coverage on the First Lien Facility, at 3.2x, was well-above covenant requirements of 2.5x. Moreover, coverage has improved since quarter end given the $1.5 billion debt extinguishment on the first lien facility post quarter end. The Series B Notes receive a one-notch benefit, reflecting DBRS’ view that the recovery may be less than the first lien notes. Finally, the ratings of the Series A Notes reflect DBRS’ view that recovery would be less than the first lien notes and Series B Notes, but greater than the unsecured debt.

The Positive trend reflects DBRS’ expectations that the Company should continue to make progress in improving and diversifying its funding profile, while restoring underlying profitability. Further, DBRS anticipates CIT positively resolving the regulatory concerns at the bank, which should allow progress in the Company’s shift to a “bank-centric” funding model and reduced reliance on wholesale funding markets.

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

The applicable methodology is Rating Finance Companies Operating in the United States, which can be found on our website under Methodologies.

This is Corporate (Financial Institutions) rating.