It could not have happened at a
worse time. With recession just around the corner, the vendor
finance arm of CIT took an unexpected hit that had little to do
with the impending economic doom. It was connected to various
vendor finance acquisitions the company made between 2004 and
2006.
CIT’s fourth-quarter 2008 accounts
included a $82 million (€64.4 million) pre-tax adjustment due to
the “remediation of reconciliation items” connected with these
purchases. Apparently CIT’s “historic systems” had not been able to
“effectively process information from these significant business
acquisitions”.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
“The charge taken relates to all exposures
emanating from bringing the reconciliations up-to-date,” CIT said
in a statement last month.
Unprecedented
troubles
All this happened at a time of unprecedented
troubles for CIT as it struggled with massive write-downs caused
largely by defaults in its consumer lending division, a business
which it finally sold in the summer of last year.
As the parent company struggled to keep going
through the crisis – including taking a €3 billion credit line from
Goldman Sachs in June 2008 to help keep its head above water – the
vendor finance arm fought its own wars.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataCIT’s shares plummeted as the liquidity crisis
took hold, along with the value of the vendor finance arm’s latest
acquisitions.
In its third-quarter 2008 accounts, the
company suffered a $350 million impairment charge triggered by
diminished earnings expectations at the vendor finance business,
coupled with a period during which CIT stock traded below its book
value.
One such business was the UK and German vendor
finance businesses it acquired from Barclays Bank in October
2006.
Asked last month whether he regretted buying
the business, CIT managing director, Europe, Cormac Costelloe
remarked: “At the time it was absolutely the right thing for CIT to
do. But the world changes and we have to change with it.”
Problems continued elsewhere. A note in its
fourth-quarter results said that $875 million of vendor finance
loans and commercial aircraft had been sold or syndicated.
Costelloe said most of this related to CIT’s aircraft leasing
business run out of Singapore, New York and Dublin, none of which
comes under his control.
A decision to stop using brokers also hit
volumes.
Commenting last month, CIT said: “Our focus is
with our strategic relationships across Europe. Through a review
process, we identified some of our historical broker relationships
were not in line with our future strategy and therefore we have
reduced our activity within this segment.”
It has also lost a number of key staff
members, including European chief operating officer, John McKenna,
who left the company in November last year, and the respected Terry
Kelleher, co-president of CIT Global Vendor Finance. However,
Costelloe reports his company is now close to hiring an operations
director.
Most of these losses amount to knock-on
effects of the credit crunch on CIT vendor finance arm. The vendor
finance business remains viable – fourth quarter revenues were up
year on year by $7 million – and probably increasingly so as
manufacturers and suppliers rely on financial help as capital
budgets dry up.
A key boost to Costelloe’s business has been
CIT’s gaining of bank holding company status. On the back of this,
last December CIT applied for $2.3 billion of funding under the US
Treasury’s Troubled Asset Relief Program.
“We can now leverage a deposit base,” said
Costelloe.
It also means CIT can borrow money at lower
rates, he added.
According to Graham McWilliams, CIT’s chief of
sales for its European vendor finance business, demand for
financing from its core vendor finance partners – Dell, Avaya,
Microsoft and others – is on the rise.
McWilliams said: “We have seen an increase in
demand from end user customers who are saying: ‘How do I continue
to invest to improve the performance of my business while reserving
cash for the difficult times ahead?’”
As a result it is “expanding some of its core
vendor finance relationships into more countries”, added
McWilliams.
Cutbacks
This is not to say there have not been
cutbacks. The vendor finance business, which globally totals around
$13 billion and previously specialised in a wide range of asset
types, will now focus primarily on the technology and office
equipment sectors.
“In 2008 we made a decision as to which
businesses are making returns and not making returns. Sometimes
that means stepping back from certain businesses,” said
Costelloe.
Despite this Costelloe is investing in CRM
technology, which provides vendor partners with the performance of
CIT’s sales and support services. This technology has now been
developed to integrate directly into some of its partners’ own CRM
solutions.
“This in turn presents joint sales
opportunities as well as the tracking of new business pipeline
activity,” CIT said.
It looks as if, after all, CIT vendor finance
has survived the storm almost intact.
