CIT's shares, bonds plunge on bankruptcy fears

Shares of embattled U.S. lender CIT plummeted and its debt sold off steeply on Thursday on escalating fears about a potential bankruptcy after the company said bailout talks with the government had ended.

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

"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."

"As a result, we expect the company to file for bankruptcy in short order," they added.

CNBC, citing a source close to the company, has said CIT is now pursuing a plan that is likely to include a Chapter 11 bankruptcy filing on Friday.

The company's stock swooned more than 80 percent to as low as 31 cents in early trading on the New York Stock Exchange as it reopened after being suspended on Wednesday afternoon.

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

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

The company was not immediately available to comment.

If CIT were to go bankrupt, it would join Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) and Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz) among large financial companies to collapse since the credit crisis accelerated last September.

While the company has indicated it needs at least $2 billion of rescue financing in the next 24 hours or it would likely file for bankruptcy, "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.

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.

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 winning bank holding company status in December so it could draw $2.33 billion of taxpayer money from the government's Troubled Asset Relief Program.

The U.S. Treasury Department had been considering an aid package that could have included a temporary loan, access to the Federal Reserve's discount window, or asset transfers to CIT's banking unit, a person familiar with the matter said. The person requested anonymity because the talks were private.

Federal Deposit Insurance Corporation Chairman Sheila Bair, whose office is already under strain as banks fail by the dozens, had been reluctant to let CIT issue government-guaranteed debt, believing that a program allowing such issuance was designed for healthy institutions.

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