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CIT Group to Sell Aircraft Leasing Business, Stock Up 8%

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Shares of CIT Group Inc. (CIT - Free Report) surged nearly 8% on the announcement of a deal to sell its aircraft leasing business, CIT Commercial Air, to Avolon Holdings Limited for $10 billion. Avolon Holdings is an international aircraft leasing company and a wholly owned subsidiary of China’s Bohai Capital Holding Co. Ltd.

The all-cash transaction is expected to close by the first quarter of 2017, subject to the receipt of regulatory approvals in the U.S., China and other foreign jurisdictions. Also, the approval of Bohai’s shareholders and the fulfillment of customary closing conditions are required to close the deal.

Notably, HNA Group, Bohai’s majority shareholder, has decided to vote in favor of the transaction. Further, as a proof of its commitment to the transaction, Avolon Holdings has deposited $500 million into an escrow account with a U.S. bank, which will be increased to $600 million during the course of the transaction. This amount is payable to CIT Group at the close of the deal, as a part of the purchase price. Also, reverse termination fee is payable in certain circumstances if the transaction is not completed.

J.P. Morgan Securities LLC, a division of JPMorgan Chase & Co. (JPM - Free Report) , served as exclusive financial advisor to CIT Group, and Bank of America Merrill Lynch, a subsidiary of Bank of America Corporation (BAC - Free Report) , provided capital markets structuring advice.

Rationale Behind the Divestiture

CIT Group is carrying out the divestiture of its leading aircraft leasing business with a view to become a leading national middle-market bank. The sale will help the company to maximize shareholder value, while balancing timing, certainty of execution, funding and tax implications. Moreover, the transaction will aid the company in its plan to focus on its core operations.

In the words of Ellen R. Alemany, Chairwoman and CEO of CIT Group, “The sale of CIT Commercial Air represents an important milestone for CIT and follows an extensive dual-track process that was designed to maximize shareholder value. This transaction will strengthen our balance sheet, simplify our business and enable us to return significant capital to our shareholders. We are making meaningful progress on our strategy to create a leading national middle-market bank.”

Financial Details

The divestiture of the CIT Commercial Air includes the sale of the operations of the aircraft leasing business, forward order commitments and certain assets and liabilities worth $11.1 billion and $1.7 billion, respectively, as of Jun 30, 2016.

Notably, the adjusted net assets amounts totals to $9.4 billion, which is being purchased by Avolon Holdings for a price of $10 billion, a premium of 6.7%.

Tax Implications

The sale of the CIT Commercial Air business is anticipated to consume $4 billion worth of U.S. Federal unrestricted Net Operating Losses (NOLs) and result in additional cash taxes of approximately $200 million. Pro forma, the company will have a net deferred tax liability and no deferred tax asset disallowed from regulatory capital.

Further, the company projects to generate sufficient U.S. taxable income, with a view to utilize all of its remaining $1.7 billion of restricted NOLs, which are subject to Section 382 – utilization limitation of $265 million per year – before their expiration.

Besides, in 2017, CIT Group’s effective tax rate is anticipated to be in the mid-30s range, also, the company is expected to become a cash taxpayer, going forward.

Amended Capital Plan

Concurrent with the divestiture agreement, CIT Group has received a “non-objection” from the Federal Reserve Bank of New York, for its amended capital plan, which is subject to the closing of the transaction.

The amended capital plan authorizes the company to return $2.975 billion worth of common equity to its shareholders, from the net proceeds of the sale. The amended plan also allows the company an additional return of up to $0.325 billion of common equity. However, this is contingent upon the issuance of a similar amount of Tier 1 qualifying preferred stock. The plan further includes the company’s objective to pay common dividends worth $64 million per year, after the completion of the transaction.

The amended capital plan also includes authorization to repurchase approximately $6 billion of unsecured debt. The company has also received the sanction to repay or transfer $1.8 billion of structured financings, currently associated with the business.

Impact of the Deal

The transaction is anticipated to help in reducing CIT Group’s reliance on wholesale debt. Further, it will help in improving the company’s profitability and boost investors’ confidence in the stock. Also, the deal is expected to assist the company in maintain a strong risk management system.

Currently, CIT Group currently holds a Zacks Rank #2 (Buy).

A better-ranked stock in the finance space is LPL Financial Holdings Inc. (LPLA - Free Report) . Shares of the company have gained nearly 38% over the past six months. Notably, the company boasts of a positive earnings surprise history of 4.7% over the trailing four quarters. Also, LPL Financial sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

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