Although pan-European lessors are keen
to buy CIT’s vendor relationships, Toshiba and Avaya say they are
sticking with the troubled lessor. Jason T Hesse
reports.
Embattled CIT continues to struggle to survive
despite having received last December a $2.3 billion (€1.6 billion)
cash injection from the US government’s $700 billion financial
bailout, as well as a $3 billion loan from bondholders – with
onerous repayment conditions attached – earlier this summer.
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As the international lender, which in its
heyday was regarded as the bellwether for consumer and business
confidence, tries to forge a way out of the mire it has trodden
into, most eyes are now focused on its high-profile air and rail
finance divisions.
Few, however, have given its vendor finance
arm much attention, except for a brief period last month when
Microsoft cancelled its $649 million five-year financing agreement
with CIT.
This lack of interest is somewhat surprising
given the fact that outstandings in its vendor business total $11.3
billion – a quarter of the entire business of the company.
No surprises, therefore, when Leasing
Life discovered last month that in July, in order to raise
some much needed cash, CIT had quietly sold its UK health-care
leasing portfolio, including all of its operating leases with the
NHS, to De Lage Landen for €18.5 million.
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By GlobalDataMeanwhile, lessors in their droves are
circling CIT and hoping they can swallow-up other parts of CIT’s
vendor portfolio at knock-down prices.
Picking up the pieces
Although some of CIT’s large programmes are
likely to remain in its hands for the time being, the vendor
business looks set to become a shadow of its former self,
particularly given the loss of Microsoft – which told Leasing
Life last month that it has “plans[…] in place for new
customers to receive financing through other vendors” – and the
fact that new business volumes almost halved year-on-year during
the second quarter of this year, from $2.4 billion to $1.3
billion.
Also, in July, a joint venture CIT had with
international tool manufacturer Snap-On, which accounted for around
$1 billion of CIT’s lease portfolio, ended when Snap-On exercised
its right to buy the company back for $8 million.
This still left the vendor finance arm,
however, with some considerable joint ventures still in place –
including its flagship Dell vendor programme.
CIT’s investment in Dell Financial Services
(DFS), which has a portfolio of over €1 billion in Europe, is
smaller than it used to be.
DFS in Europe today uses several different
lenders in Europe, not just CIT, and back in 2007 Dell bought CIT’s
30 percent ownership interest out of the US DFS vendor programme
for $306 million.
But CIT’s portfolio in Dell remains an
attractive business to acquire, and this was borne out in a
statement made by CIT last month: “We still maintain the right to
provide 25 percent of sales volume funding to DFS in 2009. We also
retain the vendor finance programmes for Dell’s customers in Canada
and in more than 40 countries outside the US that were not affected
by Dell’s purchase of our DFS interest.”
Paying attention
One company which is keeping a close eye on
developments at DFS is ECS, part of the Société Générale group.
Chris Labrey, sales director for ECS UK, told
Leasing Life that his business had already been in contact
with some of the lessor’s vendors.
Commenting directly on Dell, he said: “Would
ECS want to do the Dell programme? I don’t know – we’re definitely
one of the more acquisitive lessors on the market at the moment,
but is it part of our strategy? We would never say never.”
ECS had already been approached by CIT last
spring in order to work collaboratively with them.
“We’ve always said that we’ve wanted to work
alongside CIT and the Dell programme, because there are certain
things that CIT doesn’t want to do, or can’t do, which ECS could do
well,” Labrey added.
But CIT’s $1.4 billion international
relationship with Dell has also encountered difficulties.
In Europe, DFS has had mixed results for some
time, a former DFS director said, with the larger countries – the
UK, France and Germany – hitting targets, but the smaller
countries, particularly in eastern Europe, missing them.
“It’s always been difficult to go to market in
eastern Europe,” he said. “There were some sharp discussions
between the European management of Dell and CIT about targets
there. It was a real battle.”
The former executive believes that Dell will
choose a new partner in the long-term.
“Of course Dell is looking for a new partner –
I’ve actually been consulting Dell about this,” he said. “My view
is Dell should take a two-tiered solution: one is to have a partner
for the global customers, and then allow country or regional
managers to select their own partners locally.”
Global customers are a much more lucrative
segment for DFS, with over €200 million in revenue, as opposed to
the €150 million from the regional accounts. Penetration rates are
also much higher in this segment, between 25 and 28 percent, as
opposed to single-digits in the regional segments, which include
local customers, medium-sized customers, the dealer business, and
others.
But for now, Dell customers can continue to
get leases and financing through CIT – profitable leasing deals
that CIT needs to stay afloat, and that Dell needs to keep
financing equipment and to spread out its risks.
Staying in telecoms
Another of CIT’s big vendor partnerships is
with Avaya, the business telecoms manufacturer, which currently has
$584 million in lease receivables.
In Europe, Avaya Financial Services (AFS) is
headed up by Paul Fazakerley, the company’s European programme
director, who looks after an 11-person team.
All are employed by CIT and are tasked with
growing Avaya sales through sales-aid finance. (See Leasing
Life May 2009 for a profile of AFS.)
Due to the nature of the equipment, it is
understood that it has been difficult for AFS, which works with
Avaya on a global level, to reach decent penetration rates for
Avaya equipment sales.
The Avaya agreement is up for renewal at the
end of this month, but in a statement, Avaya told Leasing
Life that it would continue to work with CIT for the time
being.
“We continue to offer financing to Avaya
customers through our agreement with CIT Group. We’re closely
monitoring the situation, and we’re committed to continuing to
offer financing options,” the statement said.
Meanwhile, another global vendor, print
manufacturer Toshiba Tec, is still writing strong business with
CIT, Steve Hewson, the company’s UK marketing director, said.
“We are still putting substantial business
with CIT – indeed, more than 40 percent of our lease business last
month was with them,” he said.
Toshiba has a financing agreement with CIT
Bank in the US, but uses other lessors, such as BNP Paribas Lease
Group and ING Lease, in the UK and Europe. Given this commitment
from some of these large clients, it might well be that CIT’s
vendor arm survives the storm.
Last month, in fact, the lessor told
Leasing Life: “We remain committed to our global vendor
financing business as we focus on developing and executing a
restructuring plan designed to better position CIT for the
long-term, so that we may continue serving our global vendor
financing clients.”
But the fact remains that vendors want
predictability and stability, which CIT, in its current financial
state, will find hard to prove it has. This might make it easier
for pan-European lessors to buy CIT’s vendor relationships at
knock-down prices.
Fact box: CIT
- CIT was founded in 1908 and went public in 1924
- Operating in over 50 countries worldwide, the
commercial lender has more than $60 billion (€41.7 billion) in
finance and leasing assets - Global manufacturer Tyco International agreed to buy CIT for
$10 billion in 2001 but was forced to spin it off to shareholders a
year later as Tyco struggled with a massive debt burden - CIT’s shares closed at $1.27 on 27 August, down from over $60
in June 2007 - The highest paid director at CIT Capital Finance (UK) Limited
earned £774,318 (€880,599) in 2008
