SEC Company Response from CIT GROUP INC (CIK 0001171825) — Oct 26, 2005
CIT GROUP INC (CIK 0001171825)
Date: Oct. 26, 2005 · CIK: 0001171825 · Accession: 0000891092-05-002053
AI Filing Summary & Sentiment
File numbers found in text: 001-31309, 001-31369
Letter
October 25, 2005 Mr. Kevin Vaughn Branch Chief Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549
Re: CIT Group Inc. Form 10-K for the Fiscal Year Ended December 31, 2004 Form 10-Q for the Fiscal Quarter ended June 30, 2005 File No. 001-31369
Dear Mr. Vaughn:
This letter is being submitted on behalf of CIT Group Inc. (the "Company") in response to the comment letter of the staff of the Securities and Exchange Commission dated and received by the Company on September 29, 2005 relating to the Company's Annual Report on Form 10-K for the year ended December 31, 2004 and Form 10-Q for the second quarter ended June 30, 2005 (File No. 001-31309). The responses set forth below have been organized in the same manner in which the staff's comments were organized. The Company believes that its responses address all of the staff's comments.
In addition, as requested by the staff, the Company acknowledges that:
o it is responsible for the adequacy and accuracy of the disclosure in the Form 10-K and Form 10-Q;
<PAGE>
Mr. Kevin Vaughn U.S. Securities and Exchange Commission October 25, 2005 Page 2
o staff comments or changes to disclosures in response to staff comments in the filings reviewed by the staff do not foreclose the Commission from taking any action with respect to the Form 10-K and Form 10-Q; and
o the Company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Form 10-K for the fiscal year ended December 31, 2004
Management's Discussion and Analysis Off Balance Sheet Arrangements Securitization Program - page 45
1. Please tell us the following related to the SPEs:
o Specifically tell us if you consider the SPEs described on page 46 to be qualifying SPEs under paragraph 35 of SFAS 140. If so, please provide us with your analysis as to how you made this determination.
o If you do not consider the SPEs to be qualifying SPEs under paragraph 35 of SFAS 140, provide your analysis as to how you determined that these entities should not be consolidated in your financial statements under FIN 46.
o Tell us if you have obtained a legal opinion that the sale of loans or leases to these SPEs qualifies as a sale under SFAS 140.
Company response
All of our off-balance sheet securitization programs meet the sale criteria and utilize qualifying SPEs ("QSPE") as defined under SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". As noted below, we obtain a legal opinion on the sale of the assets, although the opinion does not specifically address SFAS 140.
In our securitization programs, we sell receivables (Transferred Assets) to a QSPE, which issues beneficial interests in the form of notes or certificates to third parties.
Our analysis of the structures includes a review of paragraph 9 and covers the following:
o Paragraph 9a: Transferred Assets are isolated from transferor
o We obtain an opinion from outside counsel that the Transferred Assets are isolated from the transferor, even in bankruptcy.
<PAGE>
Mr. Kevin Vaughn U.S. Securities and Exchange Commission October 25, 2005 Page 3
o Paragraph 9b: Beneficial Interest Holder (BIH) has the right to pledge or exchange their interests, and no conditions that constrain the BIH also provide benefit to the transferor.
o There are no restrictions on the beneficial interest holders' (note holders' / certificate holders') right to transfer their ownership interest, and there are no conditions that constrain the beneficial interest holder and also benefit the transferor.
o Paragraph 9c: Transferor does not maintain control through an agreement that obligates transferor to repurchase assets before maturity or the ability to unilaterally repurchase specific assets.
o Repurchase ability is limited to 10% clean-up calls or breaches of representation or warranty. The ability to substitute contracts is limited to a predefined substitution event triggered by the obligor on the securitized loans or leases, such as a breach of representation or warranty, prepayment and a limited amount of defaulted receivables.
We also analyze the structure and permitted activities of the QSPE in accordance with paragraph 35, including the following:
o Paragraph 35a: The QSPE is distinct from the transferor and at least 10% of beneficial interests are owned by third parties.
o The transferor is not entitled to unilaterally revoke or terminate the QSPE, except after the earlier of (i) the note holders / certificate holders having been paid all the principal and accrued interest in full (including the clean up call provision discussed in 9c) or (ii) after the last maturity or liquidation of all assets. In our transactions, the QSPE issues notes/certificates to third parties with a face amount greater than 80% of Transferred Assets at closing in all cases, and typically greater than 90% of Transferred Assets.
o Paragraph 35b: The QSPE has significantly limited permitted activities that are all specified in the original legal documents and can only be changed with the approval of at least a majority of the non-affiliated BIHs.
o The transaction documents contain the permitted activities of the QSPE, which are significantly limited to managing the assets and distributing benefits to the beneficial interest holders, and any amendment requires the approval of at least a majority of the third party BIHs.
o Paragraph 35c: The QSPE may hold only:
1. Passive, non-equity financial assets:
o Transferred Assets at inception are passive, are comprised of secured loans and the contractual cash flows from capital leases, and specifically exclude direct ownership in equipment or real property.
<PAGE>
Mr. Kevin Vaughn U.S. Securities and Exchange Commission October 25, 2005 Page 4
2. Passive derivatives with non-affiliated parties pertaining to non-affiliated beneficial interest:
o If the QSPE enters into a derivative transaction it does so solely to hedge its interest rate risk. The notional amount of the derivative does not exceed the amount of the third party beneficial interest.
3. Transaction documents executed at closing describe any guarantees, liquidity agreements, etc. if applicable:
o This is not applicable to our structures.
4. Servicing rights for assets it holds:
o The QSPE retains servicing rights of the assets and enters into a servicing agreement at closing with the transferor or an affiliate of the transferor to service the assets.
5. Non-financial assets acquired in connection with collection/liquidation efforts:
o The QSPE maintains a direct or indirect first priority perfected security interest in the equipment or property and receives liquidation proceeds from defaulted contracts or through vendor recourse agreements.
o For structures involving home lending receivables, the QSPE may temporarily hold foreclosed collateral resulting from collection activities related to Transferred Assets that subsequently defaulted.
6. Cash collected on financial assets and short-term investments:
o Cash related to cash reserve accounts or collection accounts can only be invested in eligible investments described in the transaction documents and must meet specific rating and maturity requirements (i.e. AAA rated, money market funds). Earnings on permitted investments are distributed to the BIHs.
o Paragraph 35d: The QSPE can sell non-cash financial assets only in automatic response to the following:
1. Decline in fair value of the assets outside the control of the transferor that is defined in the transaction documents:
o This not applicable to our structures.
2. Exercise of a put right by a non-affiliated beneficial interest holder:
o This is not applicable to our structures.
3. Exercise of a Removal of Accounts Provision specified in the legal documents:
o This is not applicable to our structures.
4. Termination of the QSPE or maturity of the beneficial interests at a fixed or predetermined date that is specified in the legal documents.
o The underlying legal documents provide for a stated final maturity date for all notes/certificates.
<PAGE>
Mr. Kevin Vaughn U.S. Securities and Exchange Commission October 25, 2005 Page 5
Consolidated Financial Statements Note 1 - Business and Summary of Significant Accounting Policies - page 58 Lease Financing - page 59
2. Despite the turmoil in the aircraft industry since September 11, 2001, your disclosures suggest that you did not recognize any significant SFAS 144 impairment losses related to your aircraft assets during 2002, 2003, 2004 or the first six months of 2005. Please provide us with:
o A description of the method you use to determine the expected future cash flows needed to calculate whether future undiscounted cash flows exceed the current asset carrying amount;
o An analysis of how you considered decreases in lease rates in determining expected future cash flows; and
o A description of the method you use to determine the fair value of aircraft assets for which impairment has occurred.
Company response
o A description of the method you use to determine the expected future cash flows needed to calculate whether future undiscounted cash flows exceed the current asset carrying amount.
The following describes the methodology we use to determine the expected future undiscounted cash flows needed to calculate whether such future undiscounted cash flows exceed the current asset carrying amount.
Our methodology distinguishes between Out-of-Production and In-of-Production aircraft, due to the significant differences in their remaining useful economic lives. For Out-of-Production aircraft, which have shorter remaining useful economic lives, we use the existing lease rentals, projected lease rentals for periods beyond the existing lease term and a terminal (scrap) residual value. For In-Production aircraft, which have long remaining useful economic lives, we use the existing lease rentals plus estimated fair value at the end of the existing lease term.
Out-of-Production Aircraft
"Out-of-Production" aircraft types in CIT's operating lease portfolio as of December 31, 2004 totaled $1.4 billion and included:
Airbus A310-300 Boeing 727-200, 737-200, 737-300, 737-400, 737-500, 747-200, 757-200, 767-300 McDonnell Douglas (Boeing) DC-10, MD-82, MD-83, MD-87, MD-11 Bombardier Dash 8 Dornier 328 SAAB 340
<PAGE>
Mr. Kevin Vaughn U.S. Securities and Exchange Commission October 25, 2005 Page 6
Cash flows from existing leases (lease rentals) are combined with projected future cash flows (lease rentals) for the period beyond the existing lease term, and a residual value (projected future fair value) at the end of the asset's estimated useful economic life. This method captures all relevant cash flows over the remaining useful economic life of the asset. Projected future cash flows (lease rentals) and a terminal (scrap) residual value (projected future fair value) are determined from market data and independent appraisal firms.
In-Production Aircraft
"In-Production" aircraft types in CIT's operating lease portfolio as of December 31, 2004 totaled $3.0 billion and included:
Airbus A319, A320, A321, A330-200, A330-300, A340-300 Boeing 737-700, 737-800, 747-400, 777-200ER
Expected future undiscounted cash flows are determined by adding, for each lease, the cash flows from existing leases (lease rentals) to the projected future fair value of the equipment at the end of the lease term. This method captures all relevant cash flows over the remaining useful economic life of each asset. The projected future fair value at lease termination is developed from appraisal values published by five independent appraisal firms (see response to Question 3), with the high and low appraisal values being eliminated to reduce the potential impact of any aberrational appraisal values. Appraisals are based on values for "mid-life" aircraft that assumes a maintenance level resulting in the various components being at the midpoint of their service life. We adjust the appraised values to reflect any differences relating to maintenance conditions between those appraised values and our assets. The remaining three appraised values are then used to develop an appraisal range of projected future fair value.
If our projected net book value at end of a lease term falls within the appraisal range of projected future fair value, then such projected net book value is used as the projected future fair value of the equipment at end of lease term. If our projected net book value at the end of a lease term is above the appraisal range of projected future fair value, then we use the average of the remaining three appraisal values and adjust depreciation prospectively over the remaining lease term to reduce the net asset value to the average appraisal amount. If our projected net book value at the end of a lease term is below the appraisal range of future fair value, we generally do not adjust depreciation prospectively.
o An analysis of how you considered decreases in lease rates in determining expected future cash flows.
For Out-of-Production aircraft, decreases in lease rates are determined from market data and independent appraisal firms. If a renegotiation or restructuring of a lease results in lower rental payments, we determine the expected future cash flows using the revised rental payments. For
<PAGE>
Mr. Kevin Vaughn U.S. Securities and Exchange Commission October 25, 2005 Page 7
In-Produ
Show Raw Text
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<TEXT>
October 25, 2005
Mr. Kevin Vaughn
Branch Chief
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Dear Mr. Vaughn:
Re: CIT Group Inc.
Form 10-K for the Fiscal Year Ended December 31, 2004
Form 10-Q for the Fiscal Quarter ended June 30, 2005
File No. 001-31369
This letter is being submitted on behalf of CIT Group Inc. (the "Company")
in response to the comment letter of the staff of the Securities and Exchange
Commission dated and received by the Company on September 29, 2005 relating to
the Company's Annual Report on Form 10-K for the year ended December 31, 2004
and Form 10-Q for the second quarter ended June 30, 2005 (File No. 001-31309).
The responses set forth below have been organized in the same manner in which
the staff's comments were organized. The Company believes that its responses
address all of the staff's comments.
In addition, as requested by the staff, the Company acknowledges that:
o it is responsible for the adequacy and accuracy of the disclosure in
the Form 10-K and Form 10-Q;
<PAGE>
Mr. Kevin Vaughn
U.S. Securities and Exchange Commission
October 25, 2005
Page 2
o staff comments or changes to disclosures in response to staff
comments in the filings reviewed by the staff do not foreclose the
Commission from taking any action with respect to the Form 10-K and
Form 10-Q; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Form 10-K for the fiscal year ended December 31, 2004
Management's Discussion and Analysis
Off Balance Sheet Arrangements
Securitization Program - page 45
1. Please tell us the following related to the SPEs:
o Specifically tell us if you consider the SPEs described on page 46
to be qualifying SPEs under paragraph 35 of SFAS 140. If so, please
provide us with your analysis as to how you made this determination.
o If you do not consider the SPEs to be qualifying SPEs under
paragraph 35 of SFAS 140, provide your analysis as to how you
determined that these entities should not be consolidated in your
financial statements under FIN 46.
o Tell us if you have obtained a legal opinion that the sale of loans
or leases to these SPEs qualifies as a sale under SFAS 140.
Company response
All of our off-balance sheet securitization programs meet the sale criteria and
utilize qualifying SPEs ("QSPE") as defined under SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities".
As noted below, we obtain a legal opinion on the sale of the assets, although
the opinion does not specifically address SFAS 140.
In our securitization programs, we sell receivables (Transferred Assets) to a
QSPE, which issues beneficial interests in the form of notes or certificates to
third parties.
Our analysis of the structures includes a review of paragraph 9 and covers the
following:
o Paragraph 9a: Transferred Assets are isolated from transferor
o We obtain an opinion from outside counsel that the Transferred
Assets are isolated from the transferor, even in bankruptcy.
<PAGE>
Mr. Kevin Vaughn
U.S. Securities and Exchange Commission
October 25, 2005
Page 3
o Paragraph 9b: Beneficial Interest Holder (BIH) has the right to
pledge or exchange their interests, and no conditions that constrain
the BIH also provide benefit to the transferor.
o There are no restrictions on the beneficial interest holders'
(note holders' / certificate holders') right to transfer their
ownership interest, and there are no conditions that constrain
the beneficial interest holder and also benefit the
transferor.
o Paragraph 9c: Transferor does not maintain control through an
agreement that obligates transferor to repurchase assets before
maturity or the ability to unilaterally repurchase specific assets.
o Repurchase ability is limited to 10% clean-up calls or
breaches of representation or warranty. The ability to
substitute contracts is limited to a predefined substitution
event triggered by the obligor on the securitized loans or
leases, such as a breach of representation or warranty,
prepayment and a limited amount of defaulted receivables.
We also analyze the structure and permitted activities of the QSPE in accordance
with paragraph 35, including the following:
o Paragraph 35a: The QSPE is distinct from the transferor and at least
10% of beneficial interests are owned by third parties.
o The transferor is not entitled to unilaterally revoke or
terminate the QSPE, except after the earlier of (i) the note
holders / certificate holders having been paid all the
principal and accrued interest in full (including the clean up
call provision discussed in 9c) or (ii) after the last
maturity or liquidation of all assets. In our transactions,
the QSPE issues notes/certificates to third parties with a
face amount greater than 80% of Transferred Assets at closing
in all cases, and typically greater than 90% of Transferred
Assets.
o Paragraph 35b: The QSPE has significantly limited permitted
activities that are all specified in the original legal documents
and can only be changed with the approval of at least a majority of
the non-affiliated BIHs.
o The transaction documents contain the permitted activities of
the QSPE, which are significantly limited to managing the
assets and distributing benefits to the beneficial interest
holders, and any amendment requires the approval of at least a
majority of the third party BIHs.
o Paragraph 35c: The QSPE may hold only:
1. Passive, non-equity financial assets:
o Transferred Assets at inception are passive, are
comprised of secured loans and the contractual cash
flows from capital leases, and specifically exclude
direct ownership in equipment or real property.
<PAGE>
Mr. Kevin Vaughn
U.S. Securities and Exchange Commission
October 25, 2005
Page 4
2. Passive derivatives with non-affiliated parties pertaining to
non-affiliated beneficial interest:
o If the QSPE enters into a derivative transaction it does
so solely to hedge its interest rate risk. The notional
amount of the derivative does not exceed the amount of
the third party beneficial interest.
3. Transaction documents executed at closing describe any
guarantees, liquidity agreements, etc. if applicable:
o This is not applicable to our structures.
4. Servicing rights for assets it holds:
o The QSPE retains servicing rights of the assets and
enters into a servicing agreement at closing with the
transferor or an affiliate of the transferor to service
the assets.
5. Non-financial assets acquired in connection with
collection/liquidation efforts:
o The QSPE maintains a direct or indirect first priority
perfected security interest in the equipment or property
and receives liquidation proceeds from defaulted
contracts or through vendor recourse agreements.
o For structures involving home lending receivables, the
QSPE may temporarily hold foreclosed collateral
resulting from collection activities related to
Transferred Assets that subsequently defaulted.
6. Cash collected on financial assets and short-term investments:
o Cash related to cash reserve accounts or collection
accounts can only be invested in eligible investments
described in the transaction documents and must meet
specific rating and maturity requirements (i.e. AAA
rated, money market funds). Earnings on permitted
investments are distributed to the BIHs.
o Paragraph 35d: The QSPE can sell non-cash financial assets only in
automatic response to the following:
1. Decline in fair value of the assets outside the control of the
transferor that is defined in the transaction documents:
o This not applicable to our structures.
2. Exercise of a put right by a non-affiliated beneficial
interest holder:
o This is not applicable to our structures.
3. Exercise of a Removal of Accounts Provision specified in the
legal documents:
o This is not applicable to our structures.
4. Termination of the QSPE or maturity of the beneficial
interests at a fixed or predetermined date that is specified
in the legal documents.
o The underlying legal documents provide for a stated
final maturity date for all notes/certificates.
<PAGE>
Mr. Kevin Vaughn
U.S. Securities and Exchange Commission
October 25, 2005
Page 5
Consolidated Financial Statements
Note 1 - Business and Summary of Significant Accounting Policies - page 58
Lease Financing - page 59
2. Despite the turmoil in the aircraft industry since September 11, 2001,
your disclosures suggest that you did not recognize any significant SFAS
144 impairment losses related to your aircraft assets during 2002, 2003,
2004 or the first six months of 2005. Please provide us with:
o A description of the method you use to determine the expected
future cash flows needed to calculate whether future
undiscounted cash flows exceed the current asset carrying
amount;
o An analysis of how you considered decreases in lease rates in
determining expected future cash flows; and
o A description of the method you use to determine the fair
value of aircraft assets for which impairment has occurred.
Company response
o A description of the method you use to determine the expected
future cash flows needed to calculate whether future
undiscounted cash flows exceed the current asset carrying
amount.
The following describes the methodology we use to determine the expected future
undiscounted cash flows needed to calculate whether such future undiscounted
cash flows exceed the current asset carrying amount.
Our methodology distinguishes between Out-of-Production and In-of-Production
aircraft, due to the significant differences in their remaining useful economic
lives. For Out-of-Production aircraft, which have shorter remaining useful
economic lives, we use the existing lease rentals, projected lease rentals for
periods beyond the existing lease term and a terminal (scrap) residual value.
For In-Production aircraft, which have long remaining useful economic lives, we
use the existing lease rentals plus estimated fair value at the end of the
existing lease term.
Out-of-Production Aircraft
"Out-of-Production" aircraft types in CIT's operating lease portfolio as of
December 31, 2004 totaled $1.4 billion and included:
Airbus A310-300
Boeing 727-200, 737-200, 737-300, 737-400, 737-500, 747-200, 757-200, 767-300
McDonnell Douglas (Boeing) DC-10, MD-82, MD-83, MD-87, MD-11
Bombardier Dash 8
Dornier 328
SAAB 340
<PAGE>
Mr. Kevin Vaughn
U.S. Securities and Exchange Commission
October 25, 2005
Page 6
Cash flows from existing leases (lease rentals) are combined with projected
future cash flows (lease rentals) for the period beyond the existing lease term,
and a residual value (projected future fair value) at the end of the asset's
estimated useful economic life. This method captures all relevant cash flows
over the remaining useful economic life of the asset. Projected future cash
flows (lease rentals) and a terminal (scrap) residual value (projected future
fair value) are determined from market data and independent appraisal firms.
In-Production Aircraft
"In-Production" aircraft types in CIT's operating lease portfolio as of December
31, 2004 totaled $3.0 billion and included:
Airbus A319, A320, A321, A330-200, A330-300, A340-300
Boeing 737-700, 737-800, 747-400, 777-200ER
Expected future undiscounted cash flows are determined by adding, for each
lease, the cash flows from existing leases (lease rentals) to the projected
future fair value of the equipment at the end of the lease term. This method
captures all relevant cash flows over the remaining useful economic life of each
asset. The projected future fair value at lease termination is developed from
appraisal values published by five independent appraisal firms (see response to
Question 3), with the high and low appraisal values being eliminated to reduce
the potential impact of any aberrational appraisal values. Appraisals are based
on values for "mid-life" aircraft that assumes a maintenance level resulting in
the various components being at the midpoint of their service life. We adjust
the appraised values to reflect any differences relating to maintenance
conditions between those appraised values and our assets. The remaining three
appraised values are then used to develop an appraisal range of projected future
fair value.
If our projected net book value at end of a lease term falls within the
appraisal range of projected future fair value, then such projected net book
value is used as the projected future fair value of the equipment at end of
lease term. If our projected net book value at the end of a lease term is above
the appraisal range of projected future fair value, then we use the average of
the remaining three appraisal values and adjust depreciation prospectively over
the remaining lease term to reduce the net asset value to the average appraisal
amount. If our projected net book value at the end of a lease term is below the
appraisal range of future fair value, we generally do not adjust depreciation
prospectively.
o An analysis of how you considered decreases in lease rates in determining
expected future cash flows.
For Out-of-Production aircraft, decreases in lease rates are determined from
market data and independent appraisal firms. If a renegotiation or restructuring
of a lease results in lower rental payments, we determine the expected future
cash flows using the revised rental payments. For
<PAGE>
Mr. Kevin Vaughn
U.S. Securities and Exchange Commission
October 25, 2005
Page 7
In-Produ