CIT rushes to secure lending, bankruptcy feared

By John Parry and Juan Lagorio

NEW YORK (Reuters) - CIT Group Inc CIT.N was in discussions on Thursday with potential lenders to secure financing, after the collapse of rescue talks with the government left the company on the brink of bankruptcy.

CIT stocks and bonds plunged as the 101-year-old lender to hundreds of thousands of small- and medium-sized businesses faced a worsening liquidity crunch that some warned could worsen the effects of the economic downturn for some firms.

After markets closed, CIT said in a statement its board of directors and management were evaluating alternatives to improve the company's liquidity, adding the firm was in discussions with potential lenders to secure financing.

As CIT's bonds also sank, around 10 to 15 CIT bondholders with over $500 million in notes of the lender held an emergency conference call on Thursday afternoon to discuss options, according to a source familiar with the matter.

Among the participants were Pacific Investment Management Co, the unit of German insurer Allianz SE (ALVG.DE) led by prominent bond fund manager Bill Gross, the person said.

An asset sale or debt restructuring would provide CIT only temporary relief and bankruptcy was the most likely scenario, analysts at investment bank Sandler O'Neill said.

When asked about CIT, White House spokesman Bill Burton told reporters that President Barack Obama had set high standards for granting aid to companies. "A lot of that had to do with whether or not they could show themselves to be sustainable in the long term," Burton said.

"With these talks ending fruitlessly, we think CIT likely was too stressed for any temporary government solution," analysts at brokerage Stifel Nicolaus said in a research note.

Fitch Ratings, Standard & Poor's and Moody's Investors Service downgraded CIT's debt ratings deeper into junk territory on the bankruptcy fears.

CNBC television, citing a source close to the finance company, said CIT was pursuing a plan that would likely include a Chapter 11 bankruptcy filing on Friday.

"The prudent course for bondholders is to brace for bankruptcy," wrote analysts at independent research firm CreditSights in a research note.

The shares of CIT, whose problems surfaced two year ago after Chief Executive Jeffrey Peek earlier in the decade engineered a move into the risky areas of subprime mortgages and student loans, plunged 75 percent to 41 cents on the New York Stock Exchange, after touching an all-time low of 31 cents.

The company's 5 percent notes due in 2014 fell to about 53 cents on the dollar on Thursday from 61.5 cents late on Wednesday, according to MarketAxess.

CIT's debt troubles briefly weighed on the broad corporate bond market, analysts said. Costs to insure U.S. corporate bonds against the risk of default rose in early trade, but then declined to trade near flat on the session.

CIT was not available to comment.