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(AP) – 10 minutes ago

NEW YORK — CIT Group Inc. shares plunged in premarket trading Wednesday as the commercial lender is reportedly trying to craft an exchange that would cut its debt and offer bondholders an equity stake in the company in a bid to avoid bankruptcy.

Shares of the New York-based financial firm, one of the nation's largest lenders to small and midsize businesses, fell 61 cents, or 27.7 percent, to $1.59 in premarket trading.

CIT Group is preparing an exchange offer that would eliminate as much as 40 percent of its more than $30 billion in outstanding debt, The Wall Street Journal said, citing anonymous sources. The exchange would hand control of the company over to its bondholders and wipe out common stockholders, according to the report.

A spokesman for the company declined comment on Wednesday.

CIT Group spent the summer trying to stave off a potential collapse amid mounting loan losses and rising funding costs. It has been devastated by the downturn in the credit markets and is attempting to restructure its operations to remain in business. CIT in the past relied heavily on cheap, short-term debt to fund its operations — a type of funding that essentially evaporated during the peak of the credit crisis last year.

The financial firm, which received $2.3 billion in federal bailout aid last fall, received a $3 billion emergency loan in July from some of its largest bondholders and completed a debt repurchase program in August to help ease its cash crunch. Those measures appear to still be short of saving CIT Group, which has said in the past it would need to continue to reduce its debt burden to survive.

Any deal with bondholders would likely wipe out most of the government's $2.3 billion bailout loan, according to the Journal.

The Journal added that if the debt exchange with key bondholders fails, CIT Group would seek bankruptcy protection in order to restructure its operations. That would make CIT Group the fifth largest bankruptcy in U.S. history.

CIT Group shares have been especially volatile in recent days amid continued uncertainty of the company's survival. A New York Post report Tuesday, saying that hedge fund manager John Paulson is considering merging the troubled finance company with failed mortgage lender IndyMac Federal Bank sent shares soaring 31.7 percent.

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