CIT Lowers High-Cost Debt, Again

Last week, CIT Group Inc. (CIT - Analyst Report) announced that it will redeem an additional $600 million of its 7% Series C senior unsecured notes. These notes mature in 2016 and will be redeemed at par on a pro rata basis.

CIT aims to complete the redemption on August 20, having already issued the redemption notice to the trustees. The Series C notes were issued in December 2009 as part of the company’s reorganization initiatives.

Following the completion of this redemption, there will be a debt of about $4.0 billion pertaining to the Series C notes in CIT’s balance sheet along with unsecured revolving credit facility. Of this amount, nearly $2.4 billion of 7% notes will be maturing in 2016 and approximately $1.4 billion of 7% notes will mature in 2017.

With the completion of this redemption, CIT would have redeemed or refinanced about $26.5 billion of high-cost long-term debt since 2010. This consisted of $7.5 billion of first lien debt, its entire $12.3 billion of Series A notes, $2.1 billion of Series B notes and $4.7 billion of Series C notes.

Earlier this year, impressed by CIT’s efforts to trim down debt, stabilize its balance sheet and reduce funding costs, Standard & Poor's (S&P) and Moody’s Investor Service, the ratings arm of Moody's Corporation (MCO - Analyst Report), upgraded the company’s long-term Issuer Credit Ratings (ICRs).

The repayment and refinancing of costly debt will reduce CIT’s funding costs in addition to improving its net interest margin and profitability. However, the company anticipates additional interest expenses in the current quarter as a result of the repayment of the above mentioned debt.

Moreover, we expect CIT to continue benefiting from its strong capital and liquidity position. Nevertheless, the sluggish growth across the economy could mar the company’s growth prospects. Furthermore, the company will have to focus on the 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. Considering the fundamentals, we also maintain a long-term Neutral rating on the stock.