On Friday, Standard & Poor's (S&P) upgraded CIT Group Inc 's ( CIT ) long-term Issuer Credit Ratings (ICRs) and affirmed the ratings outlook on the company. The agency raised the company's ICRs to "BB-" from "B+", while retaining the ratings outlook at "Stable".
The ratings revision by S&P is based on CIT's efforts to reduce debt, stabilize balance sheet and bring down the funding cost. Since 2010, the company has lowered or refinanced nearly $22 billion of its first and second lien debt. This comprised of $7.5 billion of first lien debt, its entire $12.3 billion of Series A notes and $2.1 billion of Series B notes. As of now, the only debts remaining in CIT's balance sheet are Series C Notes and unsecured revolving credit facility.
Besides lowering the funding cost, the repayment and refinancing of costly debt will also improve CIT's net interest margin and profitability. As of December 31, 2011, the company's funding cost stood at 4.28% compared with 5.97% in 2009. S&P anticipates further dip in the funding cost as the company refinances or redeems its Series C notes and improves its deposits. Moreover, lower funding cost would also enable the company to report positive core earnings this year.
Another factor that S&P considered while raising the ratings of CIT is the continuously improving credit quality of the company. Almost all the credit quality metrics of the company declined during the fourth quarter of 2011. Net charge offs as a percentage of average finance receivables decreased 38 basis points (bps) sequentially and 228 bps year over year to 0.45%. Also, CIT's non-accrual loans declined 23% sequentially and 57% year over year to $702 million.
Additionally, S&P raised CIT's Series C notes and legacy unsecured debt to "BB-". Earlier, Series C notes had a rating of "B+" while unsecured debt were rated "B". However, the ratings agency downgraded its rating on the company's unsecured revolving credit facility to "BB-" from "BB".
Additionally last month, Moody's Investor Service, the ratings arm of Moody's Corporation ( MCO ) raised CIT's ICRs to "B1" from "B2". This ratings upgrade was based on the company's stabilizing balance sheet and gradually declining cost of debt.
We expect CIT to continue benefiting from its strong capital and liquidity position. However, the sluggish growth across the economy could mar the company's growth prospects. Furthermore, the company will have to focus on the top-line improvement; otherwise, its bottom line will continue to remain under pressure.
CIT currently retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating. Also, considering the fundamentals, we maintain our long-term "Neutral" recommendation on the shares.