July 11 (Bloomberg) -- CIT Group Inc. hired Skadden, Arps, Slate, Meagher & Flom LLP as an adviser as it prepares for a possible bankruptcy filing after so far failing to win access to government guarantees for its borrowing, the Wall Street Journal reported, citing people familiar with the matter.

The hiring of the prominent bankruptcy law firm doesn’t mean a company will actually make a bankruptcy filing, the report said. “The government has not said absolutely no to anything,” the newspaper cited a person familiar with the matter as saying.

The Federal Deposit Insurance Corp., run by Chairman Sheila Bair, is in discussions with CIT about how the lender can strengthen its financial position to get approval, including by raising capital, a person familiar with the matter told Bloomberg News yesterday. CIT’s measures to improve its credit quality, such as transferring assets to its bank, have been insufficient, the person said.

“CIT continues to be in active dialogue with the government,” the company said yesterday in a statement distributed by Business Wire. “There can be no assurance that CIT’s application will be approved by the FDIC, nor as to the timing or terms of any such determination.”

The century-old New York-based lender to 950,000 businesses became a bank in December to qualify for a government bailout and received $2.33 billion in funds from the U.S. Treasury.

$3 Billion Losses

CIT, which has reported more than $3 billion of losses in the last eight quarters, faces $10 billion of maturing debt through 2010 and hasn’t had access to the corporate bond market in more than a year, according to data compiled by Bloomberg.

Without access to the Temporary Liquidity Guarantee Program, CIT may default as soon as April, when a $2.1 billion credit line matures, according to Fitch Ratings.

CIT’s $500 million of floating-rate notes due in November 2010 fell 3.5 cents on the dollar to 70 cents, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Credit-default swaps on CIT rose 2.5 percentage points to 37 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $3.7 million initially and $500,000 annually to protect $10 million of CIT debt for five years. The upfront cost reached the highest since Oct. 17, when it climbed to a record 41.5 percent, according to CMA DataVision prices.

The stock fell 33 cents, or 17.7 percent, to $1.53 in New York Stock Exchange composite trading yesterday, after earlier falling as low as $1.13, the lowest in seven years.

To contact the reporter for this story: Jonathan Burgos in Singapore at jburgos4@bloomberg.net.

Last Updated: July 11, 2009 11:09 EDT