DBRS Downgrades CIT Group Inc. to BB (high), Under Review Negative

DBRS has today downgraded the ratings of CIT Group Inc. and its related subsidiaries (CIT or the Company); including its Issuer and Long-Term Debt ratings to BB (high) from BBB (high). Concurrently, the Company’s Commercial Paper rating has been downgraded to R-4 from R-2 (high). All ratings remain Under Review with Negative Implications, where they were placed on April 24, 2009.

Today’s action considers DBRS’s opinion that CIT’s liquidity and funding profile are constrained, as market funding options continue to be limited, more costly, and more often secured in nature, while the Company awaits regulatory approval for certain actions. Pressure on CIT’s funding and liquidity profile continues to build, as the Company awaits approval from the Federal Deposit Insurance Corporation (FDIC) to participate in the FDIC’s Temporary Liquidity Guarantee Program (TLGP). Although the application is still pending, without the approval to issue lower cost FDIC-guaranteed debt, DBRS believes that CIT would be more heavily reliant on asset sales and higher cost alternative sources of secured financing, during a time when such facilities remain limited. DBRS does however recognize CIT’s continued success in obtaining alternate forms of liquidity, through increased deposits at its Bank, and its recent success in executing a $954 million TALF eligible securitization. Liquidity has also benefited from the 23A waiver transactions, which created approximately $1.5 billion of liquidity at the bank holding company as CIT transferred $5.6 billion of government-guaranteed student loans and $3.5 billion of related debt to CIT Bank as part of its initial 23A waiver. Additional 23A transactions if approved, would add incremental liquidity and CIT can still benefit from any potential approval to participate in the TLGP, however, in DBRS’s view, the benefits may be reduced by the timing and magnitude of any such approvals.

Moreover, today’s rating action reflects DBRS’s view that CIT’s pressured financial profile and franchise will continue to be stressed by the higher cost of funding, as discussed above, lower origination volumes and elevated credit costs. Additionally, the rating actions consider DBRS’s opinion that the Company’s earnings generation ability has been reduced by the aforementioned factors as well as the revenue impact of the smaller balance sheet. DBRS is concerned that the lower net income before provisions comes at a time when solid revenues are required to absorb the elevated credit costs associated with this difficult credit cycle. The ongoing recessionary environment continues to impact the creditworthiness of CIT’s borrower base as well as the value of the collateral underlying the receivables, therefore, DBRS expects credit losses to increase and remain at elevated levels for the near to mid-term. Given these pressures, DBRS anticipates that it might take longer for CIT to return to profitability.

CIT’s capital base has been reduced by recent quarterly losses. Loss absorption ability remains limited, given CIT requirements to hold additional capital as part of its recent bank conversion. CIT committed to a minimum level of total risk based capital of 13% of risk-weighted assets, while CIT Bank committed to maintaining for three years a Tier 1 leverage ratio of at least 15%. At the end of the first quarter of 2009, CIT total capital ratio was 13.1% and at the Bank level, the Tier 1 capital ratio was 15.0%, both of which are very close to these committed regulatory levels. CIT’s tangible common equity-to-tangible assets ratio declined to 4.8% from 5.6% at March 31, 2009, driven by the net loss for the quarter.

In its ongoing review, DBRS will monitor CIT’s progress in obtaining additional sources of funding; including TLGP participation and its success in attracting new deposits. Moreover, DBRS will monitor any other actions the Company may take to bolster its liquidity profile. Rating will be pressured however, if CIT is unable to obtain sufficient access to the FDIC guaranteed debt. DBRS’s review will also focus on CIT’s ability to protect its franchise, which in DBRS’s view will come under increasing pressure should the Company have to continue to further constrain origination volumes or increase asset sales. Additionally, given the low capital cushion against regulatory commitments, requirements, DBRS has minimal tolerance for losses, especially if losses reduce key capital ratios. Moreover, large losses from continuing operations may also be an indication that the Company’s franchise has been permanently weakened, which may lead to further negative ratings pressure. Alternatively, a level of ratings stabilization can be achieved should CIT evidence improved access to low cost liquidity, such as through participation in TLGP. The ability to issue lower cost FDIC guaranteed debt would reduce funding constraints, while lowering the cost of funds, both of which would help improve underlying profitability. Accordingly, DBRS would view positively indications that CIT’s near-term financial performance and earnings generation ability is improving.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is Corporate (Financial Institutions) rating.