CIT Stages a Comeback with Emphasis on M&A Financing

Filing for bankruptcy has long been thought a death sentence for lenders, considering their existence rests solely on the confidence of creditors and consumers.

Though CIT Group's bankruptcy was perhaps small when pitted against those of Lehman Brothers or Washington Mutual, it still ranked among one of the largest in U.S. history in November 2009, with $71 billion of assets and $65 billion of liabilities.

However, over the last two years, CIT has proven that bankruptcy does not have to mean the end. In fact, the lender thinks about its bankruptcy as a problem of the past as it marks its two-year anniversary since emerging from Chapter 11. What's more, CIT is doing something few other banks have been able to manage recently: focus on growth.

"Now it's all about getting back to business and getting back to lending," says Pete Connolly, president and co-head of CIT corporate finance. "We don't talk about bankruptcy with our customers anymore; it doesn't even come up. For the first year or so, we talked about it a lot."

Connolly and Jim Hudak, president and co-head of CIT corporate finance, came in to their roles in October 2008, the thick of the financial meltdown. The 100-plus-year-old commercial lender filed for bankruptcy roughly a year later, after the credit crunch dried up its funding and a U.S. bailout and debt exchange offer failed. As part of a final bankruptcy agreement hashed out by CIT, its creditors and the federal government, $2.3 billion in taxpayer money was lost.

The corporate finance group, which provides lending, leasing and advisory services to small businesses and the middle market, shrunk to 570 professionals in the process.

During the boom years of 2004 to 2007, the division grew rapidly and lost focus. For example, pre-bankruptcy it had a life sciences business, and there were a lot of losses there, Connolly admits, acknowledging that life sciences is really earlier stage lending. "Given the cycle we were in, it didn't make sense to stay in that business," he says.

Today, in the New York offices of CIT's corporate finance division, the talk is about how to better serve clients, leverage capabilities and find places where it can grow its bottom line. Most of the division's business comes from private equity firms — in the third quarter alone, it provided acquisition loans to Charlesbank Capital Partners, Golden Gate Capital and Code Hennessy & Simmons among others.

Industries the group likes include energy, entertainment, healthcare, industrials, information services and technology, restaurants, retail, sports and gaming. And during the first three quarters of 2011, it lent to companies in its sweet spots, providing more than $3 billion in new loan commitments via more than 40 deals.

These included Arcapita's buyout of women's retail clothing chain J. Jill in March, and Highstar Capital's May acquisition of power generation company Star West Generation.

CIT is also making sure it continues to work with clients that stuck with the firm during the downturn. In 2005, the bank financed Gryphon Investors' acquisition of Sheplers Western Wear. Then in 2007, it provided the private equity firm with a credit facility to buy food management company TrustHouse Services Group.

Naturally, when the markets turned and the economy entered the recession, David Andrews, CEO and general managing partner at Gryphon, was concerned about CIT's ability to support its acquisitions. However, Andrews says the firm handled the situation remarkably well, which has led Gryphon to complete more deals with CIT post-bankruptcy. In May, Gryphon completed an add-on acquisition to Trusthouse, buying A'viands Food, for which CIT provided a $65 million senior credit facility.

"They were very relationship-oriented prior, during, and after the bankruptcy. We were all dealing with turbulent times and facing challenges," Andrews says. "CIT senior level management, including Jim Hudak, actually came out to visit us in our office and explain their situation prior to bankruptcy. We appreciated that outreach."

CIT has said it will consider acquisitions to expand its business, too. "We are looking at any assets that could be out there" to support its growth, CIT Chief Financial Officer Scott Parker said last month at a conference in Boston, Dow Jones Newswires reported.

CIT as a whole is making progress financially, though the numbers do not bear that out at first glance. It reported earnings of $517 million last year and $1.3 million through the first nine months of 2011.

Assets at Sept. 30 totaled $44.5 billion, down $3.5 billion from June 30 and down $9 billion from the previous year. Cash and short-term investments declined $2.7 billion to $7.3 billion, reflecting actions taken to decrease liabilities, including debt repayments. Total loans decreased $0.5 billion during the quarter to $21.8 billion primarily due to asset sales and runoff of the consumer portfolio, as funded new business volume exceeded portfolio collections in the commercial segments.

But the bank reported signs that the quality of its loans is improving. It set aside $48 million for potential credit losses, down from $165 million. Net chargeoffs fell to $47 million in the third quarter from $101

According to the earnings release by the company, excluding accounting adjustments and early payment fees, its lending margin—the difference between its cost of funds and its yield from assets—was 1.6% in the third quarter, up from 1.5% in the second quarter and 0.95% a year earlier.

The continuing economic improvement at the bank is a testament to new leadership, say Connolly and Hudak. In February 2010, former head of Merrill Lynch & Co. John Thain came in as CIT's new chairman and CEO after he was pushed out of Bank of America Corp., which agreed to buy Merrill Lynch & Co. in 2008 at the height of the financial crisis.

At the time, analysts questioned whether Thain could pull off a turnaround. However, Thain is doing a good job, says Brian Charles, a debt and equity analyst with R.W. Pressprich & Co. "Thain has a clear vision, and so far the company has done everything he said it would. They are getting rid of noncore assets and refinancing debt; they launched a retail banking franchise and an online bank, which is a good move long-term," he says.

Thain's presence also helped settle the nerves of customers in the corporate finance division. "John Thain brought us immediate credibility both internally and externally. Bringing in somebody of his standing, employees and customers really took notice that we were actually making a long-term commitment. That helped us retain clients. His vision has been very clear," says Hudak.