CIT warns about bankruptcy, sees $1.5 billion loss

By Juan Lagorio and Dena Aubin

NEW YORK (Reuters) - CIT Group Inc said it may post a loss exceeding $1.5 billion for the second quarter and could file for bankruptcy protection if bondholders reject a debt restructuring, raising new fears that the lender to some 1 million businesses might fail.

A day after winning $3 billion in emergency financing, CIT said it might still be headed for bankruptcy court if it is unable to get enough support for a tender offer for notes that mature next month.

In late afternoon trading, CIT shares were down 27 cents, or 21.6 percent, at 98 cents, and the cost to insure CIT debt against default increased.

Several analysts and bankers have said the rescue financing might only delay a bankruptcy filing, in light of skittishness among CIT's small and mid-size business customers, and the 101-year-old lender's inability to readily tap capital markets.

"We think every day the odds of bankruptcy are substantially higher," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management. "They are fighting a huge uphill battle, and all the efforts to source temporary funding are having little reception."

Problems at CIT stemmed in part from Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans. The New York-based lender has lost close to $3.3 billion since the end of 2007.

The U.S. government declined help to CIT, forcing the company to turn to private investors for critical cash.

"A lot of people out there think this could be just a band-aid," said Christopher Munck, a high-yield bond trader at B. Riley & Co in Los Angeles. "These guys aren't out of the woods yet, and I don't think anybody believes they are."

CIT's problems came even after the company in December received $2.33 billion from the government's Troubled Asset Relief Program.

The company has been denied access to a Federal Deposit Insurance Corp program to sell government-backed debt, and said the debt tender offer announced Monday is only a first step to building necessary liquidity for the long term, a process it said could include asset sales.

"Disruptions in the credit markets that began in 2007 ... have materially worsened in the first and second quarters of 2009," CIT said in a regulatory filing.

CIT VS CREDITORS

CIT is tendering for nearly $1 billion of floating-rate senior notes due August 17, offering 82.5 cents on the dollar for bondholders who tender before July 31.

According to MarketAxess, the notes were trading at around 85 cents on the dollar on Tuesday, a sign that bondholders are likely to hold out for a higher price.

CIT said that if it filed for bankruptcy, the FDIC could place its banking unit into receivership or conservatorship, shielding its assets from creditors.