IStar Financial Inc. of New York, the commercial real estate lender seeking to avert a bankruptcy filing next year, is in talks with creditors about exchanging debt and lining up as much as $2 billion in new financing, three people with direct knowledge of the matter said.

Franklin Resources Inc., IStar's largest bondholder, is leading one of the groups offering financing, said the people, who requested anonymity because the discussions are private. They said the company is also in talks with Centerbridge Capital Partners LLC as well as other lenders, including its banks, about potential financing.

IStar, which has funded properties including the Trump SoHo hotel-condominium building in lower Manhattan, may refinance its loans with a new $1 billion to $2 billion credit line as an alternative to seeking bankruptcy protection, the people said.

IStar, which is being advised by Lazard, had about $2.8 billion of nonperforming loans as of Sept. 30 and reported that its third-quarter net loss narrowed to $75.5 million from $248 million a year earlier.

"The fundamentals of IStar's business appear to have improved, potentially making third-party or lender financing a more viable solution," said Michael Kim, an analyst at CRT Capital Group in Stamford, Conn.

"Clearly there is more work to be done given the level of troubled assets in the portfolio," Kim said, "but the strength in the credit markets may allow the company to find a workable refinancing."

Andrew Backman, a spokesman for IStar, declined to comment.

Investors have embraced high-yield, high-risk debt as the Federal Reserve has held interest rates at record lows to stimulate the economy. The extra yield that investors demand to own the bonds rather than Treasuries has shrunk to 5.75 percentage points from 21.82 percentage points in December 2008, according to Bank of America Merrill Lynch index data.

Financing talks with bondholders, banks and other potential investors are preliminary, the people said, and specifics about the size of the package or interest rates have not been determined. Any final deal is likely at least months away, according to the people.

Loomis Sayles & Co., another IStar bondholder, and H/2 Capital Partners, the investment firm run by former IStar executive Spencer Haber, are working with Franklin on the potential debt exchange and financing, according to the people. They are being advised by Milbank, Tweed, Hadley & McCloy LLP, the people said. IStar is looking to exchange existing debt for new securities with a longer maturity, the people said.

Representatives from Loomis Sayles, H/2, Franklin, Centerbridge and Milbank were not immediately available to comment.

A new facility could allow the company to refinance some of its secured debt, the people said. IStar has about $1.7 billion of loans due in June 2011, according to one of the people.

Hedge funds that hold some of IStar's loans include Silver Point Capital LP, Davidson Kempner Capital Management LLC and Monarch Alternative Capital LP, people familiar with the matter said in September. The funds are represented by Akin, Gump, Strauss, Hauer & Feld LLP, according to the people.

After creditors blocked it from amending loans, IStar considered a so-called prepackaged bankruptcy, where key terms are in place before filing, people familiar with the situation said in September.

The company needed to negotiate a "material reduction in terms to avert bankruptcy," Fitch Ratings said on Sept. 29.

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