CIT to Reduce Debt by $1.6 Billion

On Thursday, CIT Group Inc. ( CIT - Analyst Report ) announced its intention to redeem about $1.6 billion of its 7% Series C senior unsecured notes. These notes are maturing in 2015 and would be redeemed at par.

CIT aims to complete the redemption on April 16, having already given the redemption notice to the trustees. The Series C notes were issued in December 2009 as a part of the company’s reorganization.

Hence, following the completion of this redemption, there will be about $7.2 billion of debt pertaining to the Series C notes in CIT’s balance sheet along with unsecured revolving credit facility. Out of this $7.2 billion, nearly $3.1 billion 7% notes are maturing in 2016 and approximately $4.1 billion 7% notes will mature in 2017.

This move will help CIT lower or refinance about $23.5 billion of first lien and second lien debt since 2010. This comprises $7.5 billion of first lien debt, its entire $12.3 billion of Series A notes, $2.1 billion of Series B notes and $1.6 billion of Series C notes.

Moreover, impressed with CIT’s efforts to reduce debt, stabilize balance sheet and bring down the funding cost, last week Standard & Poor's (S&P) upgraded the company’s long-term Issuer Credit Ratings (ICRs) to “BB-” from “B+”. Additionally, the ratiagency affirmed the company’s ratings outlook at “Stable”.

Likewise, last month, Moody’s Investor Service, the ratings arm of Moody's Corporation ( MCO - Analyst Report ) also raised CIT’s ICRs to “B1” from “B2”. This ratings upgrade was based on the company’s stable balance sheet and gradually declining cost of debt.

Our Viewpoint

The repayment and refinancing of CIT’s costly debt will reduce the company’s funding costs besides improving its net interest margin and profitability. As of December 31, 2011, the company’s funding cost stood at 4.28% compared with 5.97% in 2009. Moreover, bringing down the high-cost debt will also help CIT to be flexible in providing much needed financing to small and mid-sized organizations.

Additionally, we expect CIT to continue benefiting from its strong capital and liquidity position. However, the sluggish growth across the economy could mar the company’s growth prospects. Furthermore, the company will have to focus on top-line improvement; otherwise, its bottom line will continue to remain under pressure.

CIT currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.