By Pierre Paulden, Elizabeth Hester and Kristen Haunss

July 18 (Bloomberg) -- CIT Group Inc. advisers, including JPMorgan Chase & Co. and Morgan Stanley, are discussing options for funding the lender if it enters bankruptcy, people with knowledge of the matter said.

JPMorgan and Morgan Stanley are talking with other banks about a debtor-in-possession loan, used to fund a company’s operations after it seeks court protection from creditors, according to the people, who declined to be identified because the negotiations are private. CIT and its advisers, including Morgan Stanley and Evercore Partners Inc., are also trying to arrange rescue financing to avert bankruptcy, they said.

CIT may need as much as $6 billion to avoid filing for bankruptcy protection after the U.S. wouldn’t give the firm a second bailout, according to CreditSights Inc. A failure of CIT, which has almost $76 billion in assets, would be the biggest bank collapse by that measure since regulators seized Washington Mutual Inc. in September.

“This thing doesn’t have a future,” CreditSights analyst David Hendler said yesterday in a telephone interview. “Anything is possible but the problem is not solvable anymore. They’re just in denial it’s finally over,” the New York-based analyst said referring to the rescue financing.

The century-old lender that finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc. is “continuing to evaluate alternatives” after failing to convince the U.S. government to back its debt, the New York- based company said July 16 in a statement.

Bondholder Calls

Curt Ritter, CIT spokesman, didn’t return telephone calls yesterday for comment. Spokespeople for the banks either declined to comment or didn’t return telephone calls.

CIT, which has reported $3 billion of losses in the last eight quarters, received $2.33 billion in funds from the U.S. Treasury in December and hasn’t been given access to the Federal Deposit Insurance Corp.’s debt-guarantee program.

Thomas Lauria, a lawyer at White & Case LLP, said in an e- mail that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to an out-of-court restructuring or an orderly bankruptcy. He said the group was waiting for a response from CIT and didn’t name its members.

Lauria was the lawyer who represented Indiana pension funds that fought the sale of most of Chrysler LLC’s assets to a group including Fiat SpA, the U.S. and Canadian governments and a United Auto Workers benefit trust.

Bondholders held calls this week to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation.

‘Ill-Prepared’

CIT’s $300 million of 6.875 percent notes due in November rose 7.5 cents on the dollar to 64 cents yesterday, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Shares rose 29 cents, or 71 percent, to 70 cents in composite trading on the New York Stock Exchange.

“It seems CIT was ill-prepared for this moment, so they’re scrambling,” said Scott Peltz, a managing director focused on restructuring at consulting firm RSM McGladrey Inc. “Unless you have all these bondholders holding hands and singing Kumbaya, I think they’re too far behind the eight ball to avoid filing.”

Another route for CIT to raise cash -- selling parts of its business -- might run afoul of bankruptcy laws. Asset sales need to be carefully handled, because if CIT later winds up in bankruptcy the purchaser could be accused of having robbed creditors of value due to them, lawyers said.

“A buyer will be liable if it buys assets at a steep discount,” said Michael Cook, a lawyer with Schulte Roth & Zabel LLP in New York. “That’s why skittish buyers tell the seller to go into Chapter 11 so they can buy the assets with the insurance of a court order blessing the sale.”

Even if the buyer does pay “reasonably equivalent value” outside of bankruptcy, unscrupulous creditors may sue to set aside the sale as a fraudulent “to squeeze more money out of the buyer,” he said.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Elizabeth Hester in New York at ehester@bloomberg.net; Kristen Haunss in New York at khaunss@bloomberg.net