Oct. 19 (Bloomberg) -- CIT Group Inc. could raise as much as $9 billion based on its assets, according to investor Carl Icahn, who said a “knock-down, drag-out fight” may be brewing over the fate of the New York-based lender.

Icahn, 73, has the capital to lend to CIT, he said in a telephone interview today, adding there’s “no question in my mind” that he’s the biggest investor in CIT debt after accumulating a stake in the past few months. He declined to say how much he held.

CIT’s board has done an “awful job,” Icahn said, adding that the government, which provided funds from the Troubled Asset Relief Program, “doesn’t want these guys around.”

Creditors are wrangling over plans to restructure CIT, the 101-year-old commercial lender teetering near collapse after losses in subprime home mortgages and student loans. CIT is asking investors to approve a debt exchange that may lock in losses and also is considering a bankruptcy filing.

“This letter is CIT’s first indication of Mr. Icahn’s interest in underwriting an alternative financing and the company intends to ask Mr. Icahn for more information regarding his proposal,” CIT said in a statement today. The company “remains open to securing financing on the most beneficial terms.”

Earlier today, Icahn released a letter to CIT’s board calling the amended debt exchange the lender is offering “incompetent and unconscionable.” The exchange would swap $29 billion of securities and reduce debt by at least $5.7 billion after CIT was locked out of the unsecured debt markets it relies on for funding. At the same time, CIT is asking bondholders to vote on a prepackaged bankruptcy plan.

Fair Value

Icahn’s plan would provide a better alternative than “shamelessly offering certain large unsecured bondholders the opportunity to purchase $6 billion in secured loans in the company at well below fair market value,” he said in the letter.

CIT’s board might be gearing up for “an unnecessary fight,” and the company would be worth more if the directors were replaced, Icahn said. The investor said he sees value in a CIT “run-off,” a strategy that typically means servicing the existing holdings until they mature without making new loans.

Bondholders should reject any offer less than 90 cents on the dollar, said analysts at Egan-Jones Ratings Co. in Haverford, Pennsylvania. With the prepackaged bankruptcy plan, bondholders would have received 70 cents on the dollar in the form of 7 percent notes, plus 83.4 percent of equity in the reorganized company, according to an Oct. 8 report from CRT Capital Group LLC in Stamford, Connecticut. This excludes most unsecured notes maturing after 2018, which are left in place, CRT said.

Icahn’s Loan

In his letter, Icahn proposed underwriting an alternative $6 billion loan, charging a 1.25 percent commitment fee and a 1.25 percent funding fee, which he said was 50 percent of the currently proposed fees.

CIT’s $300 million of 6.875 percent notes due in November climbed 2.6 cents to 72.6 cents on the dollar as of 1:45 p.m., the highest level since Oct. 2, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. The notes traded at 87.25 cents on Sept. 23.

The stock, which traded for more $61 in 2007, rose 9 cents to $1.21 at 4 p.m. in New York Stock Exchange composite trading, and has dropped 74 percent in the past 12 months.

To contact the reporter on this story: Linda Shen in New York at lshen21@bloomberg.net

Last Updated: October 19, 2009 16:35 EDT