Factors and their Funding Costs – Part II

This whole area of cost of capital is critical because it determines what assets various financial institutions can fund.  CIT is a good example to use because they are public and they have a bank.  Their cost of capital is a blended rate of various funding schemes.  Here are a few examples:

  1. CIT Bank  is a Federal Deposit Insurance Corporation (FDIC) insured online bank and wholly owned subsidiary of CIT Group Inc.  CIT Savings offers a current rate of 0.85% annual percentage yield (APY) for dedicated savers.  Banks have return on asset models and the cost of deposits (those 85 basis points you are earning on CDs) is not what internal users of capital pay.
  2. Second, rated factors like CIT can use the capital markets to raise funds.  CIT has a Standard & Poor's debt rating of BB- (non investment grade by the way), so there is no way they can ever efficiently fund investment grade corporates.  Looking at CITs most recent SEC filing, you will find they have various debt instruments outstanding:

 Senior unsecured notes are issued under the “shelf” registration filed in March 2012, and Series C Unsecured Notes. They typically mature over the next few years and carry a weighted average interest rate of 4.91%

 CIT also utilizes Special Purpose Vehicles to sell pools of leases and loans originated by the Company. The Company originates pools of assets and sells these to special purpose entities, which, in turn, issue debt instruments backed by the asset pools or sell individual interests in the assets to investors. CIT retains the servicing rights and participates in certain cash flows

3. Finally, CIT, like other factors, can have bank lines. Interests costs are typically based on LIBOR.  Again from the most recent SEC filing:

The total commitment amount under the Revolving Credit Facility is $2 billion, consisting of a $1.65 billion revolving loan tranche and a $350 million revolving loan tranche that can also be utilized for issuance of letters of credit. The Revolving Credit Facility accrues interest at a per annum rate of LIBOR plus a margin of 2.00% to 2.75% (with no floor) or Base Rate plus a margin of 1.00% to 1.75% (with no floor).

However, according to S&P, CIT's funding costs remain significantly higher than bank and non-banking peers.

 "We are unlikely to raise our ratings on fincos--particularly those that are expanding rapidly--by multiple notches because, in our view, the upswing that these companies are currently witnessing is cyclical and, therefore, temporary," said Standard & Poor's credit analyst Kevin Cole.

Looking at the above, you can see that CIT has plenty of room for profit if it lends money out at an all-in rate of 8% or more.

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