CIT completely restructured more than $30 billion of debt following its emergence from pre-packaged bankruptcy proceedings in 2009. The treasury organisation received input and support from the board, other members of senior management and advice from Bank of America Merrill Lynch, amongst others. From a starting point of highly structured, expensive and restrictive borrowings, the company has achieved the following benefits:
Significantly reduced cost of debt.
Smoothed out large maturity stacks.
Diversified funding sources.
Replaced highly restrictive debt covenants with investment grade-style covenants.
Re-established and continued to improve credit ratings.
Recovered economic profitability and returned from a loss situation.
CIT has been transformed from a company which was incurring economic losses following its restructuring due to its very high cost of debt to one which generates attractive finance margins of over 4% on its lending, leasing and advisory services. The treasury acumen demonstrated by this project is more than just a solution – it is both a necessary and game-changing shift in the company’s availability, cost and flexibility of financing sources. CIT has achieved major and significant changes in its funding profile.
The first step was to establish a credible long-term funding plan for the company. The main goals of the plan included: replacing high cost debt with more efficient and diverse sources of funding including deposits; eliminating balance sheet encumbrance; and removing restrictive debt covenants. Another objective was to re-establish ratings for the company so that it could begin re-accessing the debt capital markets.
The funding plan was drawn up by members of the treasury team, with additional involvement from the company’s CFO. The first phase of the plan involved re-establishing some of the company’s traditional funding sources and credit ratings, and beginning to pay down the high cost debt as a pre-requisite to regaining access to the debt capital markets. During the period between 2010 and 2012, excluding deposit activity, CIT entered into over $21 billion of new financings and credit facilities, which were important components of the company’s strategy to redeem high cost debt.
In 2012, CIT completed the refinancing of the entire $30 billion of high cost debt and, primarily as a result of this refinancing activity, the weighted average coupon of the company’s more than $32 billion outstanding debt portfolio has been reduced from around 6% to just over 3%, restoring the economic profitability of the business. CIT’s original goal in the long-term funding plan was to be funded a third each by deposits, secured debt and unsecured debt. The company is now 33% funded by deposits, with 30% from secured debt and 37% from unsecured debt, respectively, which is a good balance in terms of a diversified funding mix. The company has also continued to enjoy multiple ratings upgrades as a result of the refinancing. While CIT is not yet investment grade, it is now in the BB category and is continuing to focus on getting back to an investment grade rating.
In addition, CIT has smoothed out its debt maturity stacks. Aside from the high cost of the $30 billion of debt, the company was also facing some very large term debt maturities. Excluding deposits and debt repaid with pledged collateral cash-flows, $7.5 billion was due to mature in 2012, followed by $3.5 billion in 2014, $3.5 billion in 2015, $6 billion in 2016 and over $8 billion in 2017.