CIT bonds? You could be looking at taking a haircut

— -- Q: What would I get for my $50,000 worth of CIT bonds, maturing in 2022, if the company files for bankruptcy protection?

A: Nearly a year after the collapse of Lehman Bros., which put financial markets into freefall, investors face the teetering of another big financial firm: CIT.

CIT is a lender mainly to small and midsize businesses. It has a significant factoring business, in which it extends short-term loans to companies in exchange for their receivables. For instance, a shirt maker might ship blouses to a large department store and not get paid for 30 days or more. CIT would buy that claim against the department store from the shirt maker for 98 or 99 cents on the dollar, then CIT would collect from the department store.

In July, CIT stunned investors with news of its severe cash crunch. The company found itself in trouble after dabbling in a variety of riskier lending operations, including student loans and mortgages. When those loans went south, the company found itself in trouble. You can read more here about CIT's struggles.

In its regulatory filing, which accompanied CIT's press release about receiving a $3 billion loan, the company didn't rule out a filing for bankruptcy protection. And that's not good news for CIT bond holders like you.

It's next to impossible to forecast what the recovery rate on CIT bonds would be. There are still many possible outcomes for the CIT saga. CIT may try to convince the other debt holders to take stock in exchange for bonds. If that happened, you could find yourself a stock holder instead of a bond holder.

But if CIT enters bankruptcy protection, recovery rates could be low. There's no way to know for sure how much of a haircut you might take. But you can consult Finra's Trace bond trading system. Trace will show you how much CIT bonds are trading for, which will give you the market's best guess at the current value. Currently, many of the bonds are trading for 50 cents to 60 cents on the dollar, as you can see here.