Moody's did not seem as concerned about securities tied to risky mortgages about a year ago just before the onset of the credit crisis. The agency has come under fire of late due to the high ratings it had assigned to risky structured finance products, which it quickly began to downgrade amid the credit crunch. Some said the downgrade moves were too little, too late, and Moody's president and chief operating officer Brian Clarkson, who has been seen as a force behind Moody's structured finance ratings, earlier this month announced plans to retire in July.
Is CIT paying for Moody's past mistakes? If anyone is paying in the short term, it's the company's shareholders, as CIT's stock slid about 7.7% in late-afternoon trading on Friday to hover just above $10 per share.
CIT is not taking Moody's downgrade lying down. The company in response said, "We disagree with the ratings actions Moody's has taken, particularly in light of the significant progress we have made to strengthen our balance sheet, improve liquidity and position CIT for long-term success and profitability."
Hammered by the credit crunch on its home and student lending businesses, CIT in April laid out plans to unload some assets and possibly sell its $4.5 billion rail leasing business. That followed CIT's decision in March to draw down $7.3 billion of bank credit lines. In late April CIT raised about $1 billion in common equity and roughly $600 million in convertible preferred stock. Also in the first quarter, the company sold $4.6 billion of asset-based loan commitments to raise capital.
CIT is not done. CEO Jeffrey Peek at a Lehman Brothers Inc. conference last week outlined plans to raise another $8 billion to $12 billion in fresh capital, which may include a rail leasing business sale (Peek said could yield over $3.5 billion after debt), the second-quarter sales of $2 billion in loan assets and $470 million of aircraft as well as plans to apply for over $1 billion in export credit agency financing for new aircraft.
However, Moody's concerns over CIT do not entirely have to do with the company's liquidity. Michael Taiano, an analyst at Sandler O'Neill + Partners LP, said, "It sounded like [Moody's] is comfortable with CIT's liquidity position for the next 12 months. The issue they really have is they haven't been able to access the unsecured debt market. In order to justify an A rating, it usually requires that [the company] have diversified funding sources." He added that Moody's concerns focus on ultimate defaults in CIT's subprime mortgage book.
Sameer Gokhale, an analyst with Keefe, Bruyette & Woods, Inc., was surprised at the timing of the Moody's downgrade given that CIT's subprime exposure is old news. "[Moody's] comes in late and downgrades, just when the company is trying to shore up the business. Why not wait for the asset sales before downgrading?" he said. - Michael Rudnick
Moody's Investors Service was the first of the three major credit ratings agencies to downgrade commercial lender CIT Group Inc. below A-level, dropping its senior unsecured rating to Baa1 from A3 late Thursday evening. Moody's main concerns relate to the risk associated with CIT's mortgage portfolio.
