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CIT Group, Inc. / (CIT – NYSE) / $0.20

Note: FLASH REPORT; more details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated.

Reason for Report:FLASH UPDATE:3Q09 Earnings Update, misses expectations

Previous Edition: Icahn offers CIT $6 bln lifeline, October 19, 2009.

Flash Update

On November 16, 2009, CIT Group, Inc.announced its 3Q09 earnings results. Highlights are as follows:

  • Total interest incomewas $556.6 million, compared with $907.7 million in 3Q08. Total interest income reported by the Company was lower than the Zacks Digest average estimate of $620.7 million.
  • The Company reported net interest revenue, after credit provision of ($839) milion, compared with ($67.9) million in 3Q08. Analysts in the Zacks Digest Group had estimated a net interest revenue, after credit provision of ($488.9) million for 3Q09.
  • The Company reported a net loss of $1,074.5 million, compared with a net loss of $317.3 million in 3Q08. Analysts in the Zacks Digest Group had estimated a net loss of $500.4 million for 3Q09.
  • The Company reported a net loss of $2.74 per share, compared with a net loss of $1.11 per share in 3Q08. Analysts in the Zacks Digest Group had estimated a net loss of $1.33 per share for 3Q09.

On October 19, 2009, CIT Group, Inc. announced that it is asking for more information regarding activist investor Carl Icahn’s proposal to underwrite a $6 billion loan for the struggling commercial lender. In a scathing letter to CIT’s board, Icahn had termed the company’s current debt restructuring plan as a bad-faith attempt to buy votes, saying the plan offers unsecured bondholdersreturns belowmarket rates in exchange for their support for the plan,and overpays for a new loan from some existing lenders. Icahn, who is a CIT bondholder, said his plan would save CIT $150 million in fees.

On October 13, 2009, struggling commercial lender CIT Group, Inc. said its Chairman and Chief Executive Jeffrey Peek will retire at the end of the year. Media reports said Peek's departure from the helm could mean the company is closer to filing for Chapter 11 bankruptcy protection even as it seeks to restructure debt. CIT received $2.3 billion in federal bailout money.

On October5, 2009, media reports said that CIT Group, Inc. is looking to increase the size of the $3 billion bondholder loan it took in July, as part of its restructuring and as the Company now scrambles to avoid a prepackaged bankruptcy. The Company had launched a debt exchange offer last week through which the U.S Government could lose nearly 80% of its $2.33 billion investment in the troubled commercial lender. Under the exchange offer, investors in preferred shares and securities that get exchanged into preferred shares will end up with 97.5% CIT's shares, which should equal about 15.7 billion shares. The Company is negotiating on the size of the new additional facility and the parties who will provide the loans, reports said.

MORE DETAILS WILL COME IN THE IMMINENT EDITIONS OF ZACKS RD REPORTS ON CIT.

Portfolio Manager Executive Summary [Note: Only highlighted material has been changed.]

CIT Group Inc. (CIT or the Company), based in New York, is a diversified specialty lender that focuses predominately on secured commercial lending and leasing. The Company's business units consist of equipment finance, capital finance, commercial finance, and specialty finance. Founded in 1908, the Company focuses on the middle market across a wide variety of industries.

Out of thefive firms rating the stock, fourprovided neutral ratings, one assigned anegative rating, and none of the firms rendered a positive rating. Thefirm quoting the highest target price rated thestockIn line and based the valuation on tangible book value of $3.81, adjusted to reflect both the probability of bankruptcy and potential dilution. One of the firms quoting the lowest target price rated the stock Market Perform and did not provide any valuation methodology. Another firm quoting the lowest target price rated the stock Sell and based the valuation on the assumption of a 50% probability of a bankruptcy, in which case the shares would be worth a zero, and another 50% chance of the company being sold to another financial institution for $2 per share. Another firm with the lowest target price based the valuation on discount to 2010 TBV estimate of $1.61.

Neutral or equivalent outlook (80%; 4/5 firms): Target price range is $1.00 to $1.25. Given the uncertainty that continues to exist regarding the Company’s operations and prospects as the Company is still formulating its restructuring plan to establish goals for funding, operationalstructure, business mix, and balance sheet size, and the high probability that even a restructured CITwill provide little value to equity holders, the firms continue to view CIT shares as highly speculative.

Negative or equivalent (20%; 1/5firms): Target price is $1.00. The firm believes even though the $3 billion credit line hasprovided management additional time to restructure its balance sheet and reconfigure its business model, it may end up being too late to curtail the damage to CIT's core franchises as important customers havealready begun to seek financing alternatives and key employees are also at risk to defect to competitors. Further, with all major decisions requiring approval from the steering committee (composed of bondholders), the firm remains concerned about the critical decisions that are made may no longer be aligned with shareholders' interests. The firm maintains a negative rating on the shares given the highly speculative nature of thestock as more specific details of the restructuring plan are awaited. The firm expects a high degree of volatility in theshares in the near term.

September 21, 2009

Recent Events[Note: Only highlighted material has been changed.]

On September 21, 2009, CIT Group Inc. released its first podcast based on its new study, “U.S. Small and Middle Market Outlook 2009: Retailers and Suppliers Take Stock of Economic Downturn.” The podcast is featured on 5 Minute Capital ( a series of 5-minute podcasts featuring senior CIT executives commenting on current market conditions and trends in the middle market. In this installment, Jon Lucas, Chief Sales Officer and Executive Vice President of CIT Trade Finance, provided his perspective on how retail suppliers have been affected by the economic downturn. He comments, “The suppliers that sell into retail channels of distribution are experiencing difficulties. Since retailers have reduced their inventories, vendors that sell product to retailers are seeing fewer orders. At the same time, the price/value equation is being rewritten, and suppliers are working to manufacture a quality product at price points that are saleable in the market today.

Middle market companies, a key component of the U.S. economy, account for more than $6 trillion in sales and employ almost 32 million Americans. U.S. small businesses employ nearly 59 million Americans (approximately half of all private-sector jobs), constitute approximately 97% of all identified exporters, and produce approximately 29% of the known export value.

On September 14, 2009, CIT Group Inc. released a new study, according to which 7% of retail respondents believe the financial markets will turn around next year; separately, 45% believe that consumer spending will not return to the 2007 levels until 2011 or 2012. Faced with one of the most challenging years on record, retailers and those who supply them believe that consumer spending will lag the turnaround of the U.S. financial markets. The continuing softness in the retail market has caused many retailers to reevaluate and adjust their business models. They are taking a more conservative and cautious approach to the upcoming holiday season by controlling their inventories, and are planning more aggressive discounts earlier in the season. Other key findings among retail respondents include:

  • 67% will stock less inventory than in 2008;
  • 69% will expand online and direct selling;
  • 56% will advertise more aggressively;
  • 66% will offer greater discounts; and
  • 68% will hold clearance and other sales prior to New Year’s Day.

On August 17, 2009, CIT filed its SEC form 10-Q, Quarterly report. CIT declared its 2Q09 financial results. Highlights are as follows:

  • Net interest revenue was ($19.1) million versus $169.8 million in 2Q08.
  • The Company reported a net loss of $1.68 billion versus a net loss of $2.08 billion in 2Q08.
  • Reported Net loss per share was $4.30 versus $7.88 in 2Q08.

On August 17, 2009, CITannounced the expiration and successful completion of its tender offer for its $1 billion of Floating Rate Senior Secured Notes due August 17, 2009. The Offer expired on August 14, 2009. The completion of this tender offer is another important milestone as the Company continues to make progress on the development and execution of a comprehensive restructuring plan. As of the expiration date, 59.81% of the total Notes outstanding were validly tendered and not withdrawn, an amount in excess of the minimum condition. In accordance with the terms and conditions of the Offer, CIT will accept tendered Notes for payment on August 17, 2009, the settlement date, at a purchase price of $875 per $1,000 principal amount of Notes. CIT will pay amounts due on Notes that have matured but were neither tendered nor subject to the Offer in accordance with the terms of those Notes. Previously, on August 3, 2009, CIT had announced that it had amended the purchase price to $875 from the previous price of $825 per $1,000 principal amount of Notes.

On August 17, 2009, Fitch Ratings downgraded CIT Group Inc.'s issuer default rating to "restricted default" from "C” after the Company said it managed to stave off a likely bankruptcy filing by repurchasing some of its outstanding debt at a discount. Standard & Poor's Ratings Services also lowered its long-term counterparty credit rating to selective default from CC, the lowest junk rating. It also lowered its rating on the $1 billion of senior unsecured notes to D from CC.

On August 13, 2009, CIT announced that the Company’s Board of Directors has adopted a Tax Benefits Preservation Plan (the Rights Plan). While the Rights Plan will not impede the Company’s ability to pursue restructuring or strategic opportunities, it is designed to protect the Company’s ability to utilize its net operating losses and other tax assets, preserving value for the benefit of all stakeholders. This value could be reduced if the Company experiences an “ownership change” under theU.S. federal income tax rules, which occurs if one or more “5% shareholders” have aggregate increases of 50% in their CIT ownership over a three year historic period. The Rights Plan reduces the likelihood that CIT experiences in such an ownership change by discouraging any person or group from becoming a “5% shareholder.”

On August 12, 2009, CIT entered into a Written Agreement with the Federal Reserve Bank of New York (FRB), the principal regulator for its bank holding company. The agreement requires regular reporting to the FRB, as well as the submission of plans and certain restrictions related to corporate governance, credit practices, capital and liquidity and the Company's businesses. The agreement also requires prior written approval related to the payment of dividends and distributions, incurrence of debt, and the purchase or redemption of stock.

On August 11, 2009, the Company filed a notification that it is unable to file its Quarterly Report on Form 10-Q for the period ended June 30, 2009, by the prescribed filing deadline (August 10, 2009).

On August 7, 2009, CIT provided an update on the progress of several components of its restructuring plan.

  • Tender Offer Update: On August 3, 2009, the Company announced that it amended the terms of its offer for its $1 billion Floating Rate Senior Notes due August 17, 2009. The withdrawal deadline was extended to August 5, 2009.
  • Credit Facility Fully Drawn: On July 29, 2009, the Company entered into an amended credit agreement (the Credit Facility) with a group of its major bondholders. The Company has received the final $1 billion in incremental borrowings under the Credit Facility, bringing the total loan size to $3 billion. CIT will use a substantial amount of the loan proceeds to support its small business and middle market customers.
  • Suspension of Preferred Dividends: CIT also announced that the Company’s Board of Directors has decided to suspend dividend payments on its four series of Preferred Stock in order to improve liquidity and preserve capital while restructuring efforts are ongoing. Payments on the Company’s Equity Units are not affected by this decision.

On July 21, 2009, CIT announced that Moody’s Investors Service has placed its CIT Equipment Collateral 2009-VT1 Receivable-Backed Notes, Class A-1, Class A-2 and Class A-3 under review for possible downgrade. .

On July 20, 2009, CIT announced that it has entered into a $3 billion loan facility provided by a group of the Company’s major bondholders.

CIT further announced that it intends to commence a comprehensive restructuring of its liabilities to provide additional liquidity and further strengthen its capital position. These actions, including a $3 billion secured term loan with a 2.5 year maturity are intended to provide CIT with liquidity necessary to ensure that its important base of small and middle market customers continue to have access to credit.

On July 15, 2009, CIT announced that it has been advised that there is no appreciable likelihood of additional government support being provided over the near term. The Company’s Board of Directors and management, in consultation with its advisors, are evaluating alternatives to improve the Company’s liquidity.

On July 10, 2009, CIT in response to the recent media reports regarding its pending Temporary Liquidity Guarantee Program (TLGP) application with the FDIC, confirmed that its application to participate in the TLGP remains outstanding. CIT continues to be in active dialogue with the government. There can be no assurance that CIT's application will be approved by the FDIC, nor as to the timing or terms of any such determination.

Overview[Note: Only highlighted material has been changed.]

The analysts identified the following key factors for evaluating the investment merits of CIT:

Key Positive Arguments / Key Negative Arguments
  • While the operating performance of CIT continues to worsen, the company's survival hinges on its ability to devise a restructuring plan that will recapitalize the company, enable it to shrink its balance sheet in a more orderly fashion, and provide additional time to generate sufficient cash to meet its debt maturities. The restructuring will likely include debt for equity exchanges, the extension of short-term debt maturities, and asset sales.
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  • The Company has reported net losses since 2Q07. Ongoing stress in the financial markets, credit rating downgrades, and regulatory restrictions have led the Company to express substantial doubt about its ability to continue as a going concern.
  • The weak economic environment is directly impacting CIT’s credit costs.
  • Unless CIT successfully completes the restructuring plan that management is currently developing for approval by the Steering Committee, the Company will likely need to seek relief under the U.S. Bankruptcy Code.
  • If the restructuring plan does not result in sufficient capital to satisfy the Reserve Bank, the FDIC and the UDFI, the Reserve Bank or the FDIC could require the Company to divest CIT Bank or otherwise to further limit the ability of CIT Bank to conduct business and/or limit access to CIT Bank by the Company or its creditors.
  • CIT’s restructuring plan is not yet complete with respect to modifying the Company’s capital structure, and any changes to the capital structure, whether through a negotiated restructuring or in a bankruptcy proceeding, may have a material adverse effect on existing security holders.
  • CIT’s liquidity and/or ability to issue unsecured debt in the capital markets may be limited by its capital structure and by the performance of its business, market conditions, credit ratings, or regulatory or contractual restrictions.

New York-based CIT Group Inc. (CIT or the Company) is a diversified specialty lender that focuses predominantly on secured commercial lending and leasing. CIT is a bank holding company with more than $60 billion in managed assets that provides financial products and advisory services to small and middle market businesses. Operating in more than 50 countries across 30 industries, CIT provides an unparalleled combination of relationship, intellectual, and financial capital to its customers worldwide. CIT maintains leadership positions in aerospace, equipment and rail leasing, small business and middle market lending, vendor financing, and factoring. Founded in 1908 and headquartered in New York, CIT is a member of the S&P 500 and Fortune 500. The Company operates in five segments: Vendor Finance, Consumer & Small Business Lending, Trade Finance, Corporate Finance, and Transportation Finance. The Vendor Finance segment offers vendor programs, small-ticket commercial lending and leasing, U.S. government-backed small business administration loans, and liquidation of manufactured housing assets. The Consumer Finance segment provides home lending and other loans, including student-lending products that are primarily U.S. government guaranteed. The Trade Finance segment offers mid- to large-ticket asset-based and enterprise value lending and factoring. The Corporate Finance segment provides diversified middle-market equipment lending and leasing. The Transportation Finance segment offers commercial aircraft, rail, and other large-ticket equipment finance leasing and lending, project finance, and advisory services. CIT operates primarily in North America, with other locations in Europe, Latin America, Australia, and the Asia Pacific.