The lender for small and medium-sized business is having increasingly more difficulties in reaching an agreement on restructuring its debt. Just as it emerged a few weeks ago that GS had an interest in CIT’s bankruptcy, it would appear today that most bondholders are not following either on refinancing its debt or approving a prepackaged bankruptcy.

The main reason being that many “vultures” attracted by the huge portfolio of CIT and the perspective of splitting it up are playing hardball, considering that they have more to earn from a bankruptcy (particularly if they have securitized loans guaranteed by collaterals). Of course, one of these is the ominous GS.

For those who rant about bailouts, CIT has received about 2.3 Bn $ in TARP funds, all of which would most likely be lost for the taxpayer in the event of a bankruptcy of CIT. In terms of market efficiency, this is one case where letting “pure capitalism” play would end up with a disastrous result on many levels.

First, it would shut down one source of financing for small businesses which have been suffering in this recession. Second, it would concentrate into the hands of the bailed out giants the control of the market, thus restricting competition and creating an oligarchic structure. Finally, as could be expected, a whole sector of the lending market would be wiped out or submitted instantaneously to costly conditions. And I have left out the question of the loss to the taxpayer…

CIT Group Inc is seeing little interest from bondholders in a debt exchange offer aimed at repairing its fragile balance sheet, making bankruptcy increasingly likely, sources familiar with the matter said.

The lender to small and medium-sized businesses said earlier this month it was looking for investors to approve a large debt exchange that would reduce its borrowings, or to approve a prepackaged bankruptcy.

CIT is now more likely to try a prepackaged bankruptcy, two people familiar with the matter said. They declined to be identified because the exchange offer is ongoing and information about its progress is private.

But separately, investors in CIT securities said it is possible the company will not find enough debtholder approval for a prepackaged bankruptcy, which requires sufficient support before the company files for protection from creditors. Instead, CIT might have to aim for a prenegotiated bankruptcy, which typically has less support before the actual filing.

CIT spokesman Curt Ritter declined to comment.

CIT has limited time to work out its debt difficulties. It has about $3 billion of debt to repay in the fourth quarter, including both secured and unsecured obligations, according to a CIT quarterly filing with regulators.

CIT has lost access to unsecured debt markets, but has billions to refinance in coming years. In three of the next four years, it will have more debt to repay than cash to pay it back. CIT has roughly 1 million customers and more than $70 billion of assets, but many of its borrowers are struggling amid the worst recession since the Great Depression.

The company’s debt exchange aims to reduce CIT’s borrowings by at least $5.7 billion, with specific targets for lowering the company’s liabilities through 2012. The exchange offer expires on October 29.

AT LEAST TWO WANT MORE

At least two groups of investors are pushing for better terms in a bankruptcy than those suggested by the company earlier this month, one of the sources and investors said.

A subordinated debt holder said last week he was hoping to press for either more equity, or for a promise from the company to pay extra money to current subordinated debt holders if the company’s assets perform well enough.

Separately, investors holding debt that funded CIT business in Canada are pushing for greater consideration in any bankruptcy plan, too. These investors are entitled to recover money from Canadian assets and the parent company in the United States and could therefore get close to 100 cents on the dollar in any bankruptcy.

One investor that would take a hit in a CIT bankruptcy is the U.S. government. The United States’ Troubled Asset Relief Program invested $2.3 billion in CIT in December and much or all of that could be lost if the company files for bankruptcy, analysts said.

But many debt investors are likely to end up with much more than zero if CIT files for bankruptcy. One group of bondholders lent $3 billion to the company in July. That loan is collateralized by an estimated $30 billion of assets, which would ensure that the July loan could likely be paid back in full.