Less than three years after CIT Group Inc. completed itsbankruptcy reorganization, Chief Executive Officer John Thain ispersuading investors that its debt is as creditworthy as aninvestment-grade firm.

The average yield investors demand to hold the bonds of CITrather than U.S. Treasuries fell to 310 basis points as of Aug. 17,according to Bank of America Merrill Lynch index data. The averagespread on an index of BBB-rated financial firms that includes AxaSA and American Express Co., which is at least three grades abovejunk-rated CIT, was 349 basis points.

Investors are clamoring for CIT's securities as it polishes itscredit profile by unencumbering assets and replacing highinterest-rate debt with lower coupons. The commercial lender haschipped away at its balance sheet, reducing long-term debt by $10.5billion since the end of 2010 as its average bond spread hasdropped 151 basis points over the same time period.

“As they're refinancing and as they're improving their balancesheet, it's a snowball effect of getting better rates, and they'realso coming at an opportune time because spreads are tightening,”Jody Lurie, a corporate credit analyst at Janney Montgomery ScottLLC in Philadelphia, said in a telephone interview.

Matt Klein, a spokesman for the New York-based company, saidexecutives weren't immediately available to comment.

CIT has improved with the “passage of time,” according to BonnieBaha, head of global developed credit at Los Angeles-basedDoubleLine Capital LP, which oversees $40 billion and doesn't ownCIT bonds.

“They've been paying down expensive debt with cheaper debt andhave a bit more discipline than the market anticipated,” Baha saidin a telephone interview. “They've had the luxury of time, and themarket has gone their way.”

CIT sold $1.75 billion of 4.25 percent, five-year notes to yield364 basis points more than similar-maturity Treasuries and $1.25billion of 5 percent, 10-year bonds at a relative yield of 350basis points on July 31, according to data compiled by Bloomberg.Proceeds will go toward retiring the 7 percent so-called series Cdebt due 2016 and 2017, according to a July 31 news release. CITlowered its weighted average fixed coupon to 5.68 percent from 6.77percent in the fourth quarter of 2010, Bloomberg data show.

The company sold $2 billion of bonds in May, including $1.25billion of 5 percent, five-year bonds, with proceeds also used torefinance the series C notes. Those notes traded at 102.8 cents onthe dollar to yield 4.35 percent as of Aug. 17, according to Trace,the bond-price reporting system of the Financial IndustryRegulatory Authority. In 2011, the company sold $3.1 billion offive-year bonds at a 7 percent coupon.

Emergency Credit

CIT's bond sale last month had its lowest coupons on record forsimilar-maturity securities, Bloomberg data show.

Thain, the 57-year-old former Merrill Lynch & Co. chairman,was hired in February 2010 to turn around CIT, which had emergedfrom bankruptcy the previous December.

After becoming a bank during the 2008 credit crisis to qualifyfor federal help, CIT lost all three of its investment-graderatings. Denied access to a Federal Deposit Insurance Corp. programto issue government-backed securities, the lender arranged $3billion of rescue financing in July 2009 from a group ofbondholders. CIT filed for bankruptcy that November.

High-yield, high-risk debt, also called speculative grade, israted below Baa3 by Moody's Investors Service and lower than BBB-at Standard & Poor's.

Management has focused on getting rid of the expensive debtleftover from the bankruptcy that led to the loss of $2.3 billionin U.S. bailout cash. After CIT refinanced its series A and B debt,the series C became unsecured, unencumbering its balance sheet,which prompted ratings companies to upgrade it, giving it cheaperrates in the market, Lurie said.

“While they're building out their business and reintroducingthemselves as a whole new type of financing structure, they'relooking to do so with a stronger balance sheet,” Lurie said.“That's why investors see them as attractive, because they knowthat on a medium- to long-term basis, they're a credit that's animproving story.”

Treasurer Glenn Votek said on June 14 that the company “verymuch” aspires to restoring investment-grade ratings.

“It's going to take time, but we do believe that the strategyand the targets that we've laid out are consistent with the type ofa profile that would be necessary to regain investment-graderatings,” he said in an analyst meeting.

Bank-Centric

S&P boosted the firm to BB- on March 9, three levels belowinvestment grade. CIT has “shifted towards a more bank-centricbusiness model: It has repaid or refinanced a material portion ofits high-cost debt, increased deposits, and moved many U.S.originations to its commercial bank subsidiary, CIT Bank,” analystsBrendan Browne and Rian Pressman said in an April 16 report.

Moody's increased CIT to B1 in February, saying the lender hasdiversified its funding sources, extended maturities and cutencumbered assets, according to the Feb. 16 note.

After years of trying to reduce the amount of expensive debt itholds on its balance sheet, “the job is nearly done, thanks in partto the increased willingness of corporate bond investors to buy thecompany's unsecured debt,” Gimme Credit LLC analyst KathleenShanley wrote in an Aug. 8 note.

CIT cut its long-term debt to $23.5 billion at the end of thesecond quarter from $34 billion as of Dec. 31, 2010, according tothe note.

“The overall quality of CIT's portfolio is currently strong, butit can't get much better from here, and the company's cost of fundsis still higher than that of many of the larger institutions itmust compete with for customers,” Shanley wrote in an e-mail. “Withinterest rates as low as they are across the board, investors arereaching for yield, but spreads on CIT paper could widen if anyunexpected problems emerge in their lending portfolio.”

Relative yields on CIT bonds have narrowed 255 basis points thisyear to 310 basis points, or 3.1 percentage points, according toBank of America Merrill Lynch index data. The average spread on thebank's U.S. High Yield, Diversified Financial Services index hasdeclined 306 basis points to 512 in that period. CIT's sharesrallied 9.9 percent this year to $38.32 Aug. 17, compared with 14.4percent for the S&P 500 Index, including reinvesteddividends.

“I don't see it as the juice being out of this one,” Lurie said,estimating the company will return to investment grade in late 2013or early 2014. “Once they have their financing structured in such away that it's the lowest cost they can possibly get in a given timeperiod, then they have to focus on profitability, and that's thenext phase.”

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