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.

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 the lender, 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 downgraded CIT to C from BB-minus, adding the lender will have to file for bankruptcy in the very near term. Standard & Poor's also cut CIT's rating to CC from CCC-plus.

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 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 75.15 percent to 41 cents, after falling as much as 80 percent, on the New York Stock Exchange.

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 were a factor briefly weighing 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.


But the impact of CIT's potential demise will likely pale by comparison with the systemically critical collapse of investment bank Lehman Brothers 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, Fridson said. And if it is unique, it can be copied.

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 up-front 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 (on the dollar) we are more comfortable, but if it's trading close to 55 cents we are probably looking to sell, Lee said.


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.

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 government's Troubled Asset Relief Program. But the government may now allow CIT to fail.

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