CIT shares jump as lender seeks financing, struggles to survive

— -- The U.S. financial system could be about to get one of its first big gut checks since the failure of Lehman Bros., as stock and bond investors await the fate of struggling lender CIT CIT.

CIT's shares jumped 70% Friday on reports the commercial lender held talks with several large banks about securing emergency financing in hopes of avoiding a bankruptcy filing. Its stock rose 29 cents to close at 70 cents.

CIT is in talks with JPMorgan Chase, Goldman Sachs and Morgan Stanley about receiving short-term financing that may help it avoid filing for bankruptcy protection, a person familiar with the talks told the Associated Press. The person spoke on condition of anonymity because the talks are confidential.

Another option under discussion is for the banks to give CIT financing under a bankruptcy proceeding, according to the source. That would allow the company to restructure under court protection and would ease fears about restricting access to credit for thousands of small retailers, manufacturers and other businesses.

Investors are still puzzling about what to expect after CIT, a key provider of loans to small and midsize businesses, late Wednesday said the government is unlikely to provide it with the additional financial support that it needs.

President Obama has a "very high standard" for which companies can get government assistance, White House spokesman Bill Burton said Thursday.

While CIT is not a massive institution of the size of Citigroup or Bank of America, it's a top player in providing loans to small businesses. Some of these companies may have difficulty securing loans elsewhere.

"CIT will be a test of the capital markets," says Bill Larkin of Cabot Money Management. Will CIT's problems "have a noticeable impact or just fade away?"

The broad market generally took the challenges facing CIT in stride Thursday. Stocks rose nearly 1%, approached their 2009 high based on the Wilshire 5000, and posted their first four-day winning streak since June. And even the Russell 2000 index, which tracks smaller companies, including some that presumably are CIT customers, gained 1.2%.

But investors were much more sober about CIT's prospects. Its shares plunged $1.23, or 75%, to 41 cents. And the value of CIT's bonds have collapsed, with investors pricing those maturing this year for roughly 50 cents on the dollar, Larkin says.

A CIT spokesman declined to comment. But experts see a variety of alternatives for the company, including:

•Using assets as leverage to borrow. CIT still has $37 billion in assets that have not been pledged as collateral, says David Chiaverini of BMO. Lenders might be willing to provide capital in exchange for claims against those assets, he says.

•Debt-for-equity tradeoff. The company's best option for survival is to coerce lenders to trade their bonds for stock in the company, says Christopher Whalen of Institutional Risk Analytics. If lenders aren't willing to cooperate, then the government, which plowed $2.3 billion into the company as part of the TARP program, should use its clout to force it, Whalen says.

•File for bankruptcy protection. The company is finding itself running out of alternatives, as borrowers draw down loan lines and drain CIT's cash, says Sameer Gokhale of Keefe Bruyette & Woods. Gokhale says a bankruptcy protection filing is the most likely outcome.

Experts are torn on how much of a ripple effect CIT's problems will have on the slowly recovering stock and credit markets.

CIT is a key player in the business of fronting small retailers and businesses with cash to pay for materials and inventory, Whalen says. Many of these companies, which are big job creators, will stall, he says.

The company was already pulling back credit, though. In the current fiscal year, its CIT Small Business Lending unit's loan volume declined sharply, to a 1% share, less than some small regional banks, says the U.S. Small Business Administration.

CIT is "an important source of liquidity," Gokhale says. "There are more questions than answers in this situation."

Contributing: Laura Petrecca and Catalina Camia, Associated Press

Do you own a small business? What would CIT's disappearance mean to you? Where else could you go for financing? Have any advice for others looking for loans? Comment below.