CIT's shares, bonds plunge on bankruptcy fears

NEW YORK (Reuters) - Escalating fears about a potential bankruptcy of embattled U.S. lender CIT Group caused its debt to sell off steeply and its shares to plummet on Thursday after it said government bailout talks had ended.

The announcement late Wednesday followed last-ditch talks in which U.S. Treasury officials expressed concern about a worsening liquidity crunch at the 101-year-old company, which lends to hundreds of thousands of small and mid-sized firms.

"This comes as a surprise as we had thought CIT had a good chance of obtaining support," analysts at brokerage Stifel Nicolaus said in a research note. "With these talks ending fruitlessly, we think CIT likely was too stressed for any temporary government solution."

Fitch Ratings downgraded CIT to C from BB-minus, adding the lender will have to file for bankruptcy in the very near term.

Sandler O'Neill analysts said an asset sale or debt restructuring would provide CIT only temporary relief, also suggesting bankruptcy was the most likely scenario.

CNBC television, citing a source close to the debt-burdened company, said CIT is now pursuing a plan that is likely to 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.

CIT's stock swooned 74 percent to 42 cents in early afternoon trading on the New York Stock Exchange after having been halted Wednesday afternoon.

The company's 5 percent notes due in 2014 fell to about 52 cents on the dollar on Thursday from 61.5 cents late on Wednesday, according to MarketAxess.

CIT's debt troubles were a factor weighing on the broad corporate bond market, analysts said. Costs to insure corporate bonds against the risk of default rose.

The main index of investment grade credit default swaps widened to about 134 basis points, from about 132 late on Wednesday, according to Markit Intraday.

CIT was not immediately available to comment.

BILLIONS NEEDED

If the lender were to go bankrupt, it would join Lehman Brothers Holdings Inc and Washington Mutual Inc among large financial companies to collapse since the credit crisis accelerated last September.

While CIT has indicated it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file for bankruptcy, that number could be higher.

"We believe the figure is in the range of $4 billion to $6 billion-plus, making outside capital sources shy away from such a heavy recapitalization," the CreditSights analysts wrote.

CIT has about $40 billion in long-term debt, according to CreditSights. Around $1.1 billion of debt will come due in August, followed by about $2.5 billion by year end.

In addition, the net amount of credit default swaps based on CIT's debt is about $3.46 billion, according to data from the Depository Trust and Clearing Corp.

Costs to insure CIT's debt against the risk of default surged. CIT's credit default swaps widened to about 47 percent as an upfront cost, from 34 percent late on Wednesday, according to Phoenix Partners Group data.

Should CIT go bust, analysts' estimates for how much bondholders could recover vary widely from about 60 cents on the dollar to as low as 24 cents.

Richard Lee, head of fixed income at New York broker-dealer Wall Street Access and who buys and sells bonds on a near-term basis, said he was being conservative in estimating recovery rates.

"If we can buy CIT's bonds closer to 30 cents (on the dollar) we are more comfortable, but if it's trading close to 55 cents we are probably looking to sell," Lee said.

SAD END

CIT's problems surfaced two years ago in the wake of Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans, both potentially highly profitable but fraught with added risk.

Founded in St. Louis in 1908, CIT boasts on its Website that a million business customers depend on it for financing.

Many may now have to turn to another firm at a time when credit markets remain tight, reducing business activity as the government tries to lift the economy out of a deep recession.

CIT sought new help even after gaining the status of bank holding company in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program.

But the government may now allow the company to fail, believing that CIT, although an important lender, is not a pillar of the financial system, analysts said.

"This marks a sad end for the 100-plus-year-old finance company," Stifel Nicolaus analysts said.

(Additional reporting by Jonathan Stempel and Tom Ryan; Editing by James Dalgleish)