July 20 (Bloomberg) -- CIT Group Inc., the 101-year-old commercial finance company seeking to ward off bankruptcy, agreed to a $3 billion loan for 2.5 years from a group of its bondholders, according to people familiar with the situation.

CIT bondholders have committed $2 billion of the loan as of today, and plan to raise the remaining $1 billion from existing bondholders within the next 10 days, said one of the people, who declined to be identified because the negotiations are private. The board agreed to the financing yesterday, and CIT plans to announce the agreement as soon as today, another person said.

The funds would give CIT a chance to restructure its debt outside of bankruptcy, said one of the people. CIT will attempt a cash tender offer for its bonds in August as part of a broader recapitalization, the person said.

CIT needs time to strike deals with bondholders to reduce debt after the U.S. declined to give the firm a second bailout. New York-based CIT, which reported $3 billion of losses in the last eight quarters, received a $2.33 billion rescue from the U.S. Treasury in December after converting to a bank holding company to also be eligible to sell bonds backed by the Federal Deposit Insurance Corp.

“We still think it is a losing effort in the intermediate term although some bondholders may end up better than others with this structure,” said David Hendler, an analyst at CreditSights Inc. in New York. “The wholesale model is dead and creating a branch deposit system from scratch is too expensive for CIT and takes too long to build to help any time soon.”

Barclays Arranging Funding

CIT would pay interest of 10 percentage points more than the three-month London interbank offered rate, the people said. Libor, a lending benchmark, is 0.51 percentage point.

Barclays Capital is arranging the funding, said another person familiar with the negotiations. Creditors including Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co., Centerbridge Partners LP, Oaktree Capital Management LLC, Pacific Investment Management Co. and Silver Point Capital LP agreed to provide the money, according to a person familiar with the deal.

Howard Marks, chairman of Oaktree, declined to comment. Seth Klarman, head of Baupost, didn’t immediately return a call and an e-mail seeking a comment. Todd Fogarty, a New York-based spokesman for Silver Point Capital, declined to comment. Jeffrey Aronson, a co-founder of Centerbridge, didn’t immediately return a call for comment. Maura Griffin, a spokeswoman for Capital Research, declined comment.

Shares Soar

Pimco, which manages the world’s biggest bond fund, is CIT’s largest bondholder according to regulatory filings. Mark Porterfield, a spokesman for Pimco, didn’t respond to a phone call and an e-mail seeking comment.

CIT Chief Executive Officer Jeffrey Peek didn’t return a call seeking comment.

CIT’s shares soared 55 cents, or 79 percent, to $1.25 as of 4 p.m. in New York Stock Exchange composite trading. The stock plummeted 85 percent this year before today.

A bondholder bailout of the company “means they’re not going to file tomorrow,” said Adam Steer, an analyst with CreditSights. “I still, ultimately, think because CIT’s funding model is not fixed there is a high chance that equity holders will be wiped out.”

CIT, which has posted losses on home mortgages, student loans and credit to commercial customers, has $1 billion of floating rate notes due next month. The company has about $10 billion of debt maturing through next year including a $2.1 billion credit line in April.

Insurers as Investors

Earlier, bondholders held calls to discuss whether to swap some claims for equity to reduce indebtedness, according to a person familiar with the situation. CIT finances about 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc.

Insurers are also among CIT’s largest investors. Aflac Inc., the world’s biggest seller of supplemental insurance, had about $240 million in CIT senior debt at the end of March and Richmond, Virginia-based Genworth Financial Inc. had about $178 million of the notes, Jeffrey Schuman, an analyst with KBW said last week in a report to investors. Insurers may have changed their investments since the end of the first quarter, and portions of the holdings may be protected by hedges, Schuman said.

CIT’s advisers, including JPMorgan Chase & Co. and Morgan Stanley, discussed with other banks about a debtor-in-possession loan to fund the company’s operations should it enter bankruptcy, people with knowledge of the matter said last week.

Meanwhile, bondholders hired law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP and investment bank Houlihan Lokey Howard & Zukin to advise them, according to a person familiar with the matter.

FDIC Concern

The demise of CIT, which has almost $76 billion in assets, would represent the largest bank failure by that measure since regulators seized Washington Mutual Inc. in September.

The FDIC, led by Chairman Sheila Bair, was unwilling to back CIT’s debt on concern that the guarantees would put taxpayer money at risk because CIT’s credit quality was worsening, people familiar with the regulator’s thinking said this month. The agency’s main mission is protecting depositors, rather than bank holding companies and their investors.

CIT has said its bankruptcy would put 760 manufacturing clients at risk of failure and “precipitate a crisis” for as many as 300,000 retailers, according to internal documents.

Factoring Service

CIT accounts for about 70 percent of all short-term U.S. financing known as factoring, worth about $40 billion annually, according to Ray Ecke, president of Credit Management Resource in Oakland, New Jersey. In factoring, one company purchases another’s accounts receivable.

Moore-Hendley Inc., an Alabama-based company that supplies tools and other items to hardware stores and home centers, became the first to blame CIT for its bankruptcy. The company said in court papers it was forced into Chapter 11 because it had difficulty getting financing from its lender, CIT.

CIT’s $1 billion of floating-rate notes that mature next month rose 18 cents to 88.5 cents on the dollar as of 4:11 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Caroline Salas in New York at csalas1@bloomberg.net; Linda Shen in New York at lshen21@bloomberg.net

Last Updated: July 20, 2009 16:13 EDT