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By Jennifer Yousfi
After posting four consecutive quarterly losses, CIT Group Inc. (CIT) took a step in the right direction yesterday (Tuesday), announcing it struck $1.8 billion in separate deals with Lone Star Funds and a subsidiary of Warren Buffet's Berkshire Hathaway Inc. (BRK.A, BRK.B).
Dallas, Tex.-based Lone Star will acquire CIT's home lending business, which has $9.3 billion in assets and related servicing operations, for $1.5 billion in cash and the assumption of $4.4 billion in outstanding debt, MarketWatch reported.
In an unrelated deal, Vanderbilt Mortgage & Finance Inc. will pay $300 million for CIT's prefabricated home loan portfolio. Vanderbilt is the wholly owned financial subsidiary of Clatyon Homes Inc., which was purchased by Berkshire Hathaway in August 2003.
"These sales complete our exit from all home lending businesses, removing the uncertainty surrounding this asset class, and advances our strategic transformation into a company focused entirely on commercial finance," CIT Chairman and Chief Executive Jeffrey M. Peek said in a company statement.
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CIT plans to use the cash proceeds of the sales to pay off maturing debt and will refocus its business on commercial lending, after being wracked by losses stemming from the subprime mortgage crisis.
"Ugly prices, but this basically had to happen in order for CIT to survive," David Havens, a credit analyst with UBS AG (UBS) in Stamford, Conn., said in a note to investors, Bloomberg News reported. "CIT continues to make progress in addressing thorny liquidity issues."
The bottom line won't be rosy just yet, as CIT forecasts a $2.5 billion loss in the second quarter of 2008 due to an estimated $2.2 billion loss on the sales and an additional $300 million operations loss during the period. But the company feels the sales were an important measure "to reduce risk and enhance liquidity."
Despite the loss, the sales and planned use of the proceeds represent "a step in the right direction" for CIT, David Chiaverini, an analyst with BMO Capital Markets in New York, told Bloomberg. "In this market environment, lenders and corporate debt buyers are concerned about commercial debt as well."
CIT Group shares rose almost 30% with a gain of $2.02 to close at $8.83 yesterday.
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CIT Rises on $1.8 Billion Sale of Mortgage Units