CIT Group Inc , a 101-year-old lender fighting for survival, is planning a large debt exchange offer within weeks and may not sell any assets before fixing its capital structure, a source close to the company said on Friday.

CIT, which lends to nearly a million small and mid-sized companies, has already launched a cash tender offer for some notes, and earlier on Friday amended the terms to encourage more bondholders to tender their notes early.

The planned exchange offer would likely include debt-for- debt and debt-for-equity exchanges and work across all bond maturities or a significant portion of them, said the source, who declined to be named because the plans are not public.

While CIT's collapse would not pose a systemic risk, according to analysts, it could hurt manufacturers' and retailers' financing as they approach the holiday season, worsening the effects of the economic downturn.

They are a huge supplier of capital for not just retailers, but also for vendors and, if the supply chain of inventory gets interrupted at holiday season, that could have a negative impact on the sector, said Daniel Hurwitz, chief operating officer of shopping center owner Developers Diversified Realty Corp , told analysts.

CIT has estimated that its funding needs for the year ending June 30 include $7 billion of unsecured debt. It has about $40 billion of long-term debt, according to CreditSights.

CIT is also considering asset sales as part of the longer-term restructuring plan, said the source, who added the company had no reason to believe regulators would change their mind about helping the lender.

The specialty lender had asked regulators for permission to transfer some assets to its banking unit in Utah and issue debt under a government-backed program, but they refused, pushing the company to the brink of bankruptcy.

The company is doing what it can to try to avoid a bankruptcy court, said KBW analyst Sameer Gokhale. It may be the best possible outcome for all stakeholders, including the government with its $2.3 billion TARP investment.

CIT's problems stem in part from Chief Executive Jeffrey Peek's decision earlier in the decade to expand into subprime mortgages and student loans.

The New York-based lender estimates it lost more than $1.5 billion in the second quarter due to bad loans and writedowns.

Concerns about the company's financial health increased even after CIT received the TARP capital in December.

CIT repeated on Friday in a regulatory filing that it could still file for bankruptcy if the offer failed and it did not obtain additional financing.

LOAN SHARK RATES

On Monday, CIT launched a tender offer for $1 billion of notes due in August in the first step of a restructuring plan after the collapse of rescue talks with the U.S. government.

The lender said on Friday it increased the premium for bondholders who enter the restructuring plan before July 31 to $50 per $1,000 of principal amount.

Bonds tendered before July 31 will be bought back for $825 per $1,000 face amount, while those tendered later will be bought for $775. Initially, the company had offered to buy back the bonds for $800 per $1,000 face amount, with a $25 premium for those noteholders that tendered them by July 31.

Pretty clearly they are giving an incentive to people to do it sooner rather than later, Gokhale said.

CIT stock closed up 1 cent at 75 cents on the New York Stock Exchange. They were up another 6.7 percent to 80 cents in after hours electronic trading.

CIT's floating rate notes due in August traded on Friday at 80.125 cents on the dollar, up from 79.375 cents at Thursday's close, according to MarketAxess.

The problem with CIT is that their raw material, which is money, costs them far, far more than their competitors, billionaire investor Warren Buffett said in an interview with Fox Business Network.

You can't pay loan shark rates and compete with people who are getting their money on a government guaranteed basis for practically nothing.

Buffett's Berkshire Hathaway Inc offered to buy some CIT assets last year, but was turned down because the offer price was considered too low, The Wall Street Journal reported on Friday.

RESTRUCTURING PLANS

The New York Federal Reserve Bank has concluded in a stress test that the company needs $4 billion of regulatory capital.

The firm could sell its aviation finance and rail finance operations as part of its restructuring plan, the Journal said, citing sources familiar with the matter.

(Reporting by Juan Lagorio, Jonathan Stempel, Ilaina Jonas, Walden Siew and John Parry; editing by Matthew Lewis and Andre Grenon)

Citigroup