CIT Scraps Student Lending Business

CIT Group's (CIT - Cramer's Take - Stockpickr) decision Thursday to scrap its student loan business comes as speculation of a buyout for the troubled commercial finance company grows.

The lender, which late last year stopped originating private student loans, said it was backing away from all government guaranteed student loans to concentrate on its core commercial franchise. For now, CIT is keeping and will continue to service the roughly $11.6 billion in student loans in its portfolio, 95% of which carry a 97% government guarantee against default.

The tab for leaving this business will be a pre-tax charge of $20 million, with roughly $15 million to be recognized in the second quarter. The company is expected to report first-quarter earnings April 17.

The New York-based finance company has been rattled since last month, suffering a series of setbacks due to its exposure to risky subprime mortgages. On March 19, Fitch Ratings placed the issuer default rating and debt ratings of CIT Group on a negative rating watch. The following day, CIT tapped into its $7.3 billion unsecured line of credit, raising concerns about the viability of the company's finances.

Compounding the bad news, CIT also provided financing to ATA Airlines. The airline declared bankruptcy Thursday.

The situation has increasingly led to speculation CIT could be a buyout target. Names such as vulture investor Wilbur Ross and Warren Buffett's Berkshire Hathaway(BRK.A - Cramer's Take - Stockpickr) have been mentioned as potential suitors.

But with a market cap of $2.7 billion and a portfolio of $83 billion, the number of potential suitors is limited.

CIT seemed to be preparing for a challenging year. It sold off its 30% interest in a Dell Financial Services. It has already stated that it will cut 5% of its staff this year, as well. Its $8.8 billion subprime portfolio, however, is a burden at a time when the credit markets want nothing to do with such risky debt. It also has $8 billion in commercial aircraft leasing, an industry that is contending with high fuel prices and heavy competition.

The company could potentially sell off the student loans that are on its books, but ultimately 80% of its portfolio depends on a strong industrial economy within the U.S., which seems unlikely for 2008. Although the company has not suspended dividend payments, the expectation is that it can't continue to make the payments considering the dire situation the company is in.

CIT did not immediately respond to phone calls Thursday.

Goldman Sachs analyst James Fotheringham, in a note Wednesday, said financial institutions "interested in expanding their middle market presence and who can take advantage of funding synergies" are the most likely buyers. The analyst gives the company a neutral rating.

"However, given current market conditions (and as evidenced by recently closed transactions) we do not anticipate an acquisition at a premium," Fotheringham wrote.

David Ritter of Argus Research, in a note last week, cited CIT's "deeply discounted valuation, its strong core portfolio of assets, and the potential to expand its net interest margins" in labeling the company an "attractive" takeover target. He reduced his target price to $20 from $40, but maintains a buy rating on the stock.

"We believe that CIT will seek to sell the entire company," Ritter wrote. "We believe that CIT's problems are largely the result of the current credit crunch."

One potential suitor, according to Ritter, is GE Capital, a division of General Electric(GE - Cramer's Take - Stockpickr).

CIT is the largest independent commercial finance company and was spun off from Tyco International in 2002. Shares have lost 73% of their value over the last 52 weeks and the stock is currently trading down 6 cents to $14.09.