Ira Sohn Conference: Jeff Aronson on CIT Group

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May 25, 2011
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Jeff Aronson is co-founder and managing principal of Centerbridge Partners, a private investment firm with approximately $14 billion of capital under management. The firm is focused on private equity, distressed securities and credit investing. Prior to founding Centerbridge with Mark Gallogly in October 2005, Aronson was a partner at Angelo, Gordon & Co., where he led all of the firm’s distressed securities and leveraged loan efforts. Before joining Angelo, Gordon in 1989, Aronson served as senior corporate counsel at L.F. Rothschild & Co., and he began his career as a securities attorney with the law firm of Stroock, Stroock & Lavan. Aronson graduated with honors from Johns Hopkins University, where he serves as a trustee, and has a J.D. from New York University School of Law.

From his talk:

We do not invest in stocks much; we are a PE shop. We rarely get in a stock straight-out. However, we got into CIT Group (CIT, Financial) when it came out of bankruptcy.

CIT has corporate finance, hard-asset loans.

Financing aircraft.

Small office financing for computers, equipment, etc.

Even though CIT looks like a bank, it funds itself through the credit markets. In the 2000s CIT strayed and got into lending to companies that didn’t have hard assets, got into commercial RE. The company lost access to bond markets.

We bought CIT debt and in 2009 some firms offered $3 billion in financing. However, in fall of 2009 the company declared bankruptcy at $71 billion, making it the fifth largest in history. We became equity investors as a result of the debt investors being offered equity stakes.

Book value on GAAP basis is $45. Based on fresh bank accounting, CIT’s balance sheet is marketed to market. Their assets are carried at 89 cents on the balance sheet, as opposed to banks where it is marketed at 100.

This adds $7 billion.

CIT also has about $2 billion in DTA. It does not appear on their balance sheet. This will be reversed when CIT returns to profitability. This adds about another $7 billion. So this adds some $14 billion to the book value.

CIT also has some built-in growth. The company has a large cost of funds 7.2%. Commercial banks have around 1.2%. When CIT’s cost of funds starts to normalize this will help the company.

CIT is a misunderstood company. It has very difficult-to-read financials because of fresh bank accounting.

All the major I-banks have 2011 earning estimates all over the street. The street really does not understand it.

Tier 1 capital is 20% compared to 12% for commercial banks. It has $12 billion in cash and securities. CIT could be a buyer of a retail bank or be bought out itself

Valley National bank is a good example. They have $14 billion in assets and $9 billion in trades at 14x earnings.

Deposits are only 14% of funding base; at Valley deposits are close to 100%. If the companies were merged, it could increase EPS because cost of funds will go down, even without synergies.

CIT could be bought out by Wells Fargo (WFC, Financial), U.S. Bancorp (USB, Financial) and several other banks. These banks have lots of excess capital and will not be allowed by the government to do sharebacks or dividends.

Four reasons it would be an attractive target:

CIT’s asset yields are 8% versus 4% which banks are targeting.

CIT’s $2.1 billion DTA.

Buyer can generate significant synergies.

CIT’s “economic earnings” should be 1.76 in 2011.

Potential purchase price of $65 a share.

Conclusion: CIT is cheap. Stock is trading at discount to IV; there are multiple near-term catalysts. The management has been delivering and has impressed regulators. John Thain is strong and highly motivated to increase shareholder value. Even though we are not stock pickers this one was too good to pass by.

Disclosure: I am long CIT
3 / 5 (13 votes)

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