CIT Group Inc stood on the brink of bankruptcy on Thursday after rescue talks with the government collapsed and the specialty lender's bondholders convened emergency talks among themselves.

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.

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 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 led by prominent bond fund manager Bill Gross, the person 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.

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.

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

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.

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.

The company 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 Treasury's Troubled Asset Relief Program. The government may now allow CIT to fail.


The impact of CIT's potential demise, however, will likely pale by comparison with the collapse of investment bank Lehman Brothers Inc last September, analysts said.

It's not a systemic risk in the way Lehman and AIG were, said Martin Fridson, chief executive officer of Fridson Investment Advisors LLC. CIT isn't viewed as that kind of company.

Any financial service company can be replaced and there's very little that is unique. And if it is unique, it can be copied.

Still, the ripples of a collapse could be widespread, hurting cultural institutions that have relied its donations and sponsorship programs [ID:nN16432242] and sectors that rely on it for financing, including retailers [ID:nN16431544] and sports teams [ID:nN16422499].

While CIT has indicated it needed 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 48 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 conservative in estimating recovery rates.

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

(Additional reporting by Jonathan Stempel, Walden Siew, Tom Ryan, Jennifer Ablan, and Matt Spetalnick; Editing by James Dalgleish and Leslie Adler)