CIT was the doyenne of independent small-business and middle-market lending — until it wasn’t. During the financial crisis, the commercial-financing firm became a bank holding company to access funds from the Troubled Relief Asset Program. It then filed for Chapter 11 bankruptcy protection in November 2009. But the company has rebounded, in part through asset sales that have cleansed its balance sheet. In its third-quarter earnings report, CIT said its commercial portfolio grew 8 percent year-over-year, and its non-accrual loans fell to 1.18 percent. CIT bank has also amassed $12 billion in consumer deposits.
As a bank, CIT now has federal regulators regularly looking over the quality of its portfolio. But in many ways CIT is still CIT. It still plays in many of the same spaces — like commercial financing and leasing and vendor finance — where private capital providers do and competes against them regularly.
Neil Wessan is group head of CIT Capital Markets, the arm of CIT that structures, prices and distributes all financial products that CIT originates. He talked with CFO recently about the state of middle-market lending and what kind of loans the company is underwriting . An edited version of that interview follows.
What kind of companies is CIT targeting?
Our target is middle-market companies that have at a minimum $10 million to $15 of EBITDA although we will also look at companies up to and north of $50 million to $75 million of EBITDA. We’re focused on securing lead lender positions in transactions as well as participatory roles.
Because things are so competitive, have you had to adjust the firm’s risk appetite?
Leverage is still a little lower than it was at the peak of the last cycle. Terms and conditions have loosened to some extent, especially in some of the larger deals. Covenant-lite terms are much more prevalent, frankly, in the more liquid, large-deal market. However, in our universe, it’s a lot less prevalent, so we view the transactions we do as carrying less risk because there are covenants that offer some protection.
As a bank, as a holder of assets, we are conscientious of the impact of our transactions over the life of the asset. We’re not selling down to zero. In 2007 and 2008, for the most part the institutions that got into real trouble were the ones who were distributing down to zero, so it didn’t matter what they were putting into their deals. And when things came to a head, large banks had literally tens of billions of dollars of paper that they didn’t want. They couldn’t sell that paper to anyone. If you’re buying a piece of paper and structuring it so that you’re holding it for the life of the transaction, it’s a lot less risky.
How do you balance your lending between cash-flow and asset-based?
We provide financing, leasing and advisory services to our middle-market clients and their customers across more than 30 industries. We understand the dynamics of these sectors, and because of that we’re comfortable taking the risk that our cash-flow loan will be returned to us. We also look at the valuations of the companies and the size of the loans against the enterprise value to ensure that we’re not pushing things too far from a credit perspective. If a lender is doing a health-care deal, and doesn’t understand the sector, and the borrower has reimbursement risk, then the lender is subject to having bad things happen to it. At CIT, we pride ourselves in the industry expertise. We recently closed a wind-power transaction. In order to complete such a deal you need to understand all the elements of what’s going on in power regulation; what’s going on in the specific market for which that wind generator is producing power and what alternate sources of energy are available to compete with the project.
In the public markets, many companies are issuing debt to pay a dividend to equity holders. What do you like to see your borrowers use their loan capital for?
We are comfortable with our borrowers using the loan proceeds for refinancing, for growth, for acquisitions and, to a limited degree, dividends. Obviously it’s a lot more interesting to us as an institution to provide capital for a company to grow their business through the acquisition of a competitor or the building of a plant. However, you can’t ignore financing dividends to equity holders. You can’t take yourself out of the marketplace altogether because at times its an appropriate use of capital. When we look at funding a dividend payment to shareholders, we want to make sure that the owner of the company still has a real interest in the company succeeding.
As a bank, do you provide other business-banking services to your clients?
We offer caps and swaps to our clients so that they could potentially lock in the current low interest rates and protect themselves from the adverse effects of any potential interest-rate jump that might come in the next couple of years.
Think about it — if you’re a middle-market company and you want to buy a swap there’s a small amount of credit risk associated with that swap. Who better to understand your company than your lead lender or a strong lender in the credit? Otherwise, trying to get a third party to provide a swap may be almost impossible.
So with the capital available, how active is middle-market lending?
I think the middle market will probably stay active, but things can change quickly. Regulators are putting a lot of pressure on banks to keep leverage reasonable.