CIT to shed $10 billion mortgage assets

NEW YORK (Reuters) - CIT Group Inc (CIT.N) said on Tuesday it agreed to sell nearly $10 billion of mortgage assets, in a deal that removes problem loans from the commercial lender's balance sheet, lifting its shares 18 percent.

However, broader questions remain about how the company will finance its operations as borrowing in the bond markets becomes increasingly difficult, analysts said.

"This was an albatross around their neck and they're cutting it loose," said David Chiaverini, analyst at BMO Capital Markets.

The company said on Tuesday it is selling a $9.3 billion subprime mortgage portfolio to private equity firm Lone Star Funds for $1.5 billion in cash, with Lone Star also assuming $4.4 billion of outstanding debt and other liabilities.

CIT also said it agreed to sell a $470 million portfolio of loans financing manufactured homes for about $300 million to Vanderbilt Mortgage and Finance, a unit of Warren Buffett's Berkshire Hathaway (BRKa.N).

The company will take a pretax second-quarter charge of about $2.5 billion due to the sale. CIT said transaction costs were around $300 million and it had already taken reserves of around $1.2 billion on the assets it had sold.

CIT has billions of dollars of debt maturing this year, and selling assets is part of Chief Executive Jeff Peek's strategy to pay back the obligations.

The company is still in the process of selling its roughly $4 billion railcar leasing business, which is expected to be completed in the third quarter.

CIT has also sold $1 billion of common shares and $500 million of convertible preferred shares, received $3 billion of financing from Goldman Sachs, and cut its dividend.

"We do not think that we need to raise additional capital," Peek said. CIT estimated a tangible equity-to-managed assets ratio of more than 9 percent as of June on a pro forma basis.

CIT rose $1.26 to $8.07 on the New York Stock Exchange at mid-afternoon, up 18.5 percent from Monday when financial stocks fell broadly. Over the last 12 months, the company's shares have fallen about 85 percent.

ILL-FATED FORAY

In March, CIT drew on its entire $7.3 billion of bank lines after it was unable to otherwise refinance maturing short-term debt known as commercial paper.

CIT, a 100-year-old company, has struggled with rising losses after making an ill-fated foray into subprime mortgage lending and student loans. Delinquencies and defaults in subprime mortgages and student loans have been rising broadly and financing those assets has been difficult as those markets have seized up.

The company has been exiting the mortgage and student loan businesses so it can focus on commercial finance.

The subprime mortgage business that it agreed to sell includes both loans and operations that collect payments from borrowers. The sale of the mortgages is expected to be completed in July, while the transfer of the payment collection business will be completed by the first quarter of 2009, CIT said.

JPMorgan Chase & Co and Morgan Stanley advised CIT.

The cost of protecting CIT's debt against default for five years edged wider by 0.02 percent, to 7.37 percent or $737,000 a year for every $10 million of debt protected, according to Markit Intraday.

(Additional reporting by Sweta Singh in Bangalore and Karen Brettell in New York, editing by Richard Chang)