In a continuing attempt to prop up its balance sheet and stem the slide of its debt rating,
is abandoning the residential loan business.
The commercial finance company said it would sell its home lending business to Lone Star Funds for $1.5 billion in cash and the assumption of $4.4 billion in debt. The business employs roughly 300 people and consists of $9.3 billion in assets and related servicing operations. CIT also is unloading a manufactured housing portfolio valued at $470 million to Vanderbilt Mortgage and Finance for approximately $300 million.
"We made the decision one year ago to exit the home lending business," CEO Jeff Peek said on a conference call. "The transactions will take us completely out of the business."
It's another step in the company's efforts to remain viable amid the stubborn credit crunch that has gripped markets since last summer. Moody's Investors Service in May
. The rating agency kept CIT's long-term debt under review until CIT could get a grip on its mortgage risk.
Cramer: What to Do With CIT Now
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The company responded by raising $1.6 billion in new capital, selling $2 billion in assets and using deposits to fund $600 million in loans at the CIT Bank.
also provided a $3 billion, 15-year financing facility.
"We thought we could sell it, and then the market seized," CFO Joe Leone said of the mortgage business on the conference call. "We thought we could hold it and manage it. But then saw a chance to get out." He conceded it would help them with the ratings agency. "We previewed this transaction with the ratings agency and their response was favorable," he said.
CIT expects to record a $2.5 billion loss on the home lending unit. The net proceeds from the two deals should generate roughly $1.8 billion in cash.
"The sale is at a significant discount, but we think the price is fair given the overall housing market," Peek said.
CIT is predominantly a commercial finance company, but has valuable assets in its railcar portfolio and aircraft leasing portfolio. The company made ill-timed jumps into the housing and student loan markets.
Argus Research analyst David Ritter considers the company a takeover target.
"We believe that CIT may be an attractive takeover target due to its deeply discounted valuation, its strong core portfolio of assets, and the potential for an acquiring company to expand CIT's net interest margins," Ritter wrote.
"This gives us an additional cushion around maturing debt in 2008,"Leone said. "We think our capital position remains relatively strong. We expect to be profitable going forward."
The stock recently was rising 12.3% to $7.64 in recent trading.