The announcement by CIT Group Inc. that John A. Thain will retire as Chief Executive Officer (CEO) at the end of first-quarter 2016, following the announcement earlier this week that CIT's Chief Financial Officer (CFO) Scott T. Parker will depart the company in November 2015, brings the strategic and financial policies of their successors to the forefront according to Fitch Ratings. CIT's ratings are unaffected at this time, but Fitch notes that execution risk is likely to be elevated for some time while CIT seeks to manage the transition of two of its senior most leaders, the continued integration of OneWest Bank N.A. (OneWest) and the potential sale of a meaningful portion of the existing business.
Management Turnover in Evolving Business
It is highly unusual for CEO and CFO changes to be announced the same week, particularly during a period when the company and the capital markets are not under material duress. In CIT's case, the timing is not ideal as the integration of OneWest remains on-going, but directionally, it follows Thain's execution of the post-bankruptcy restructuring and growth of CIT over the past five years.
Fitch has viewed Thain as presenting CIT with incrementally higher key man risk relative to peers, given his significant influence on the firm's strategic direction and his strong reputation with market participants. That said, Fitch does not view his announced departure as posing imminent credit risk to the institution, largely because of the efforts he has already led to restructure and stabilize the company.
Split of Chairman and CEO Roles Positive
Thain will remain Chairman of the Board after his retirement as CEO, which is a positive from a corporate governance perspective as split Chairman and CEO roles provides a clearer delineation between board oversight and executive management roles. The fact that Thain will remain involved in a board capacity may also help to ensure a smoother management transition while preserving existing strategic goals and firm culture.
Credible Succession
In Fitch's opinion, CIT is enacting a credible senior management transition. Thain's successor (effective March 31, 2016), Ellen R. Alemany, and Parker's successor (effective Nov. 1, 2015), Carol Hayles, bring a combination of external perspectives and internal familiarity with CIT at the Board and management levels, respectively, to their new roles. Alemany has served on CIT's board since January 2014, and has considerable previous industry experience within RBS Citizens Financial Group, Inc. and Citigroup Inc. Hayles also has a long track record as Corporate Controller at CIT and in leadership roles at Citigroup Inc.
Ensuring a smooth management change is particularly important in CIT's case given the on-going OneWest integration and the company's announced plan to explore strategic alternatives for its $10 billion Commercial Air business and certain CIT Canada and CIT China businesses. Successful execution on these initiatives would allow CIT to refine its position as commercial bank tailored primarily to U.S. small business and middle market customers.
Financial Policies in Focus
With CIT surveying strategic alternatives for the Commercial Air business and certain CIT Canada and CIT China businesses, portfolio refinement as opposed to expansion seems the more likely route near term, and Fitch will monitor whether there will be any changes in financial policy under the leadership of Alemany and Hayles and as the business repositioning is effectuated.
Quick Take on Strategic Alternatives
The potential divesture of the Commercial Air business coincides with a supportive market for aircraft lessors, as evidenced by Avolon Holdings Ltd.'s recently announced sale to Bohai Leasing Co. Ltd. for a 31% premium to its pre-announcement share price. It also follows acknowledgement by CIT earlier this year that it has previously had dialogue with certain activist investors.
As CIT's bank has grown in size, synergies from the aircraft leasing business have become less meaningful for the overall business given limitations on how much of the aircraft leasing business can be funded with bank deposits and how much of CIT's net operating loss carryforward can be captured with gains in the aircraft leasing business. Nevertheless, an aircraft leasing divestiture would reduce overall earnings diversity by business line and geography and the questions related to use of proceeds remains unanswered. At June 30, 2015, pro forma for the OneWest transaction, financing and leasing assets from commercial airlines (including the commercial aerospace portfolio and additional financing and leasing assets) represented 14.8% of total assets.
The potential sales of certain CIT Canada and CIT China businesses are viewed as less impactful, given their smaller size. At June 30, 2015, pro forma for the OneWest transaction, non-transportation-related businesses in Canada and China each represented approximately 1% of total assets.