Published: Friday, 17 Jul 2009 | 2:53 PM ET

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CIT Group's talks with many lenders have transitioned primarily to how the company would receive financing once it files for bankruptcy, CNBC has learned.

Although talks are continuing on financing outside of bankruptcy, sources said that discussions are also focused on a so-called debtor-in-possession loan, in which CIT would receive money after a bankruptcy filing.

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For that reason, a bankruptcy filing is unlikely on Friday, although the situation remains fluid.

Earlier, Reuters reported that CIT is in talks with JPMorgan Chase and Goldman Sachs Group for short-term financing of $2 billion to $3 billion as the lender looks for ways to avoid a potential bankruptcy.

CIT is still in talks with bondholders for a debt-to-equity swap, a source told Reuters.

One potential scenario before CIT is also a sale of some assets to raise capital, the source said.

A bankruptcy, however, is still possible over the next few days, and CIT is maintaining an ongoing dialogue with regulators about the situation, the source said.

The lender had wanted regulators' permission to transfer assets to its bank unit, but it did not happen, the source said. The source did not want to be identified because the talks are not public.

CIT could not immediately be reached for comment.

The stock

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[CIT  Loading...      ()   ] of the 101-year-old lender to thousands of small and medium-sized businesses rebounded after losing 75 percent of its market value on Thursday when the government refused to provide emergency financing for the company.

The Wall Street Journal reported Thursday night that CIT's large bondholders were discussing a plan to exchange $5 billion of debt for equity.

"While the debt for equity exchange would be very dilutive for current shareholders, it could save the company from bankruptcy," said Sameer Gokhale, an analyst at KBW.

"If they do that for $5 billion then they will probably strengthen their balance sheet enough to where they might be available to make other sources of financing and maybe assistance from the government," he added.

The New York Post reported on Friday that JPMorgan Chase

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[JPM  Loading...      ()   ] could acquire CIT's factoring unit, which finances more than $50 billion of wholesale inventory, at a time of the year when the collapse of the lender could disrupt retailers holidays plans.

But Gokhale cooled expectations of an asset sale.

"It has some valuable franchises, but if they sell the assets in a distressed situation, they don't even get the par value for the assets. They will have to take losses and those losses will further weaken the balance sheet, so that doesn't seem to be a viable strategy," he said.

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"They haven't thrown the towel, and they still are trying to work very hard to get some sort of funding, but at the end of the day I still think that there is a very high risk of a bankruptcy event," he added.

CIT, which got $2.3 billion of bailout money in December, had warned that depriving it of more federal aid could imperil about a million corporate borrowers—from Dunkin' Donuts franchisees to retailer Dillards

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[DDS  Loading...      ()   ] . But the Obama administration turned down the company's request, showing it's drawing a line in the sand on federal rescues for troubled financial firms.

If CIT can improve its liquidity, either through debt restructuring or by getting an injection of private equity, that could give it better leverage to reopen talks with regulators. The most likely avenue for survial would be getting permission to transfer assets to the company's bank. The bank could then borrow against that money at a discount if the Fed allows it.

Such transfers require approval from the Fed and the FDIC because regulators don't want banks—whose deposits are insured—to risk insolvency by bailing out their parent companies.

Regulators resisted CIT's earlier plea for permission to make a transfer because they didn't think the company was strong enough, and worried it would default on any loans from the Fed. With a stronger balance sheet, CIT may make a better case.

Both Fitch Ratings and Moody's further downgraded CIT's debt Thursday following the company's announcement that it expects no further federal support.

"I think it makes a bankruptcy filing a near certainty," banking analyst Bert Ely said of the refusal to bail out CIT.

CIT's small size relative to other big commercial banks may also ease worries of a ripple effect. Though a major lender to small and midsize U.S. business with about a million clients, CIT is one-eighth of the size of Lehman Brothers when massive credit losses forced the investment bank into bankruptcy last fall.

CIT had also begun cutting back on lending in recent months, diminishing the risk a possible bankruptcy could cause significant damage to the broader economy. The lender had $5.3 billion in credit lines to customers as of March, down from $6.1 billion at the end of 2008.

"That shows they were pulling back and should lessen the immediate blow of this," said Kathleen Shanley, an analyst at corporate bond research firm Gimme Credit. "I don't see a real contagion effect here."

The Bush administration paid a price for its decision not to save Lehman Brothers, whose collapse helped spark the financial crisis last fall.

Asked about CIT, a Treasury Department spokeswoman said in an e-mail that "even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies."

A bankruptcy filing would wipe out CIT's shareholders and the government's $2.3 billion stake. But CIT's clients would not automatically lose their lines of credit, longtime banking analyst Bert Ely said.

Still, with other lenders to retailers already under financial strain, many CIT clients may lose their financing options. "The industry just won't be able to absorb the amount of volume," said Michael Cipriani, executive vice president of Rosenthal & Rosenthal Inc., a competitor of CIT that's considered healthy.

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The company in April posted a larger first-quarter loss than expected and has seen funding options disappear as investors shy away from purchasing all but the safest forms of debt. The lender has $7.4 billion in debt coming due in the first quarter of 2010, plus other obligations.

Though a fraction of the size of big commercial banks, CIT's holdings are substantial. The company had $75.7 billion in assets as of March 31, according to a corporate filing.

Lehman Brothers, which collapsed after former Treasury Secretary Henry Paulson declined to save it, listed $639 billion in assets when it filed for bankruptcy Sept. 15.

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