As a return of competition to the European leasing market looks more and more imminent, Fred Crawley gets the details on a significant comeback.

Just 8 months out of bankruptcy protection, American lender CIT has posted stronger-than-expected Q2 profits of $142.1 million, on $1 billion worth of new business.

It has secured 2.5bn of new funding globally since January, including an unprecedented £100 million facility reserved for UK vendor finance, as well as repaying nearly two thirds of its high-priority debt.

What all this means for its leasing competitors in Europe is that, if they weren’t figuring an active CIT in to their mental view of the market ahead, they should be doing so now.

Back in the game

Speaking exclusively to Leasing Life, the company’s global head of Vendor Finance, Ron Arrington, said that CIT was “aggressively out in the market”, with a view to increasing business.

Arrington has good reason to be bullish – his vendor finance division is occupying a more prominent position than ever within CIT, after 2009 saw the company sell or reorganised wide swathes of peripheral business in order to focus on its most profitable segments.

The total volume of VF business written during H1 2010 was down year-on-year in absolute terms, but occupied a significantly higher proportion of CIT’s total lend than it did a year earlier.

Furthermore, this prominence looks to increase – of $2.5 billion in funding secured so far this year, some $1.8 billion is earmarked specifically for Vendor Finance.

One particularly interesting component of this is a £100 million conduit facility closed in London and destined for the UK arm of the business, the first such facility that CIT has arranged outside North America.

For players in the UK IT vendor finance market, many of whom have been very busy in pushing into the gaps left by CIT’s recessionary troubles, this is a clear signal that their old rival is back in the game.

Getting the model working

There is still some way to go, however. For CIT, success has always meant borrowing money cheaply and lending it at a higher rate – a strategy that left it in such trouble when cheap capital vanished from the market in the aftermath of the credit crisis.

To get the model working again, CIT has two major challenges. The first is to gain access to new and inexpensive sources of liquidity, a cause which the healthy $2.5bn of credit facilities closed so far this year would seem to support.

Arrington says Vendor Finance has closed nearly $2 billion in funding facilities since the start of the year, adding “as we look to continue diversifying funding sources, liquidity is not under pressure.”

CIT’s second challenge – to reduce the cost of debt repayments in the aftermath of Chapter 1 – is also being tackled at a rate that has shocked many analysts.

Some 4.5 billion of the group’s first lien debt has now been paid back, comprising 60 percent of what CIT came into 2010 with. The balance, meanwhile, has been refinanced at a lower cost.

“The diversification of funding and the actions the company has taken to pay down our higher cost debt is helping the margins in our business” said Arrington.

In order to help repay debts, CIT has sold off just 5 per cent of its total balance sheet in the last year, including over $1 billion in corporate finance and student loan receivables and a joint venture with Canadian lender CIBC.

Also divested was CIT’s equipment finance business in Australia and New Zealand, a decision that Arrington said was made “to reduce exposure to the consumer lending market”.

More than just price

While CIT’s core funding model returns to health, CIT’s Vendor Finance division in Europe will concentrate on profitable sales aid leasing, primarily in the IT, Telecoms and Office equipment markets. 

Arrington commented that, while customer investment appetite remains “somewhat muted” in these sectors, the constant need for businesses to replace and upgrade high-tech assets had incurred a healthy level of demand for finance.

The relative health of these sectors poses its own challenge to CIT, however. Many UK and European lessors, also noticing the opportunities to be had in technology finance, have been prospecting the arena for vendor schemes of their own over the last two years. 

CIT will face stiff competition from these peers as it carves out a larger space in the market, but Arrington is confident of his division’s “strong value proposition” in Europe – despite the fact that it will still be limited in its capacity to drive down prices.

“Our value proposition goes beyond price” said Arrington, referring to a “best in class” service offering involving recently upgraded CRM systems, a strong level of contact with vendor partners, and high flexibility in supporting different resellers’ various routes to market.

Healthy Tension

In a sign of its increasing appetite, CIT last month began transacting business through a new vendor programme with fast-growing PC manufacturer Lenovo.

In addition to seeking out new relationships such as this, Arrington’s division will be turning its attention to “maximising business” within existing programmes – news that will be music to the ears of partnered resellers looking to achieve more finance sales.

Will it be difficult to balance reseller’s demands for greater conversion of finance proposals with the need to ensure healthy returns through selective credit control?

“In good times as well as bad,” says Arrington, “there is always a healthy tension between credit approval rates and new business volume. We will continue utilising our best in class credit scoring models, and also the expertise of our people – they know our resellers and their customers’ businesses really well and this helps ensure prudent lending.”

Overall, Arrington is optimistic that CIT’s reputation for global reach and service provision, together with the decisive steps it has taken towards redressing its financial situation, will give it what it needs to push ahead in a high-pressure IT finance market – “We will be a key player, and we will be a global player.”

Will CIT regain the place it occupied before the onset of the credit crisis? Arrington’s answer is simple – “ We’ve made tremendous progress so far”

Article contributed by Fred Crawley, Senior Reporter – Leasing Life & Motor Finance

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