Oct. 28 (Bloomberg) -- Carl Icahn, who says he’s the largest bondholder of CIT Group Inc. with $2 billion of debt, stepped up his attacks on the lender’s restructuring plan as a deadline approaches tomorrow to avert collapse.

Icahn gave CIT an hour to respond late yesterday afternoon to his offer to provide $4.5 billion in financing, and threatened to sue the New York-based company if it chose a competing package from other bondholders. CIT said its plan to either exchange $30 billion of debt for new bonds and equity or file a pre-packaged bankruptcy is worth more to creditors.

“He’s throwing supposed financing alternatives at CIT at the 11th hour, which may possibly derail the pre-packaged bankruptcy plan,” said Brian Charles, a debt analyst at brokerage firm RW Pressprich & Co. in New York.

CIT, which funds 1 million businesses from Dunkin’ Brands Inc. to Eddie Bauer Holdings Inc., lost $5 billion in nine quarters as the collapse of the market for subprime mortgages sparked the worst financial crisis since the Great Depression and cut off its short-term funding.

Founded 101 years ago, CIT has asked its bondholders to agree to swap their claims for 70 cents to 90 cents on the dollar in the form of new debt plus equity in the out-of-court swap, or 70 cents and shares in a prepackaged bankruptcy. If both plans fail, CIT Chief Executive Officer Jeffrey Peek said last week that unsecured claims may fetch as little as 6 cents on the dollar in a “free-fall bankruptcy.”

‘Smaller’ Holders

Icahn, 73, who built his reputation in the 1980s as a corporate raider, said yesterday the investments are worth more in a traditional bankruptcy than in a so-called pre-packaged workout. He is proposing to buy “smaller” holders’ bonds for 60 cents on the dollar in a tender offer lasting 30 days if they reject CIT’s plans, “assuring them a floor price in the event the notes trade lower,” he said yesterday in a statement.

CIT fell 4 cents, or 4.2 percent, to 92 cents as of 11:23 a.m. in New York Stock Exchange composite trading. The stock, which traded as high as $61.36 in February 2007, fell 79 percent this year through yesterday.

“He’s trying to obtain a commanding position and dissuade people from accepting the exchange offer and/or the prepackaged bankruptcy,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “Neither of those will assist him in realizing value for his current holdings.”

Litigation Threat

The New York-based investor also offered CIT a $4.5 billion loan that has identical terms to a loan being arranged by Bank of America Corp., except lower fees, he said in a separate statement. Icahn said he would charge a 2.5 percent commitment fee, half of the other loan, saving the company $112.5 million.

If CIT closes on the financing from the other bondholders, Icahn said he intends “to challenge the validity of the loan and the liens through the courts.”

Icahn said he was prepared to work “through the night to close the loan and save the company a significant amount of money,” according to the e-mailed statement received by Bloomberg News less than an hour before a 6 p.m. deadline yesterday in New York.

CIT “is buying votes by wasting company money,” Icahn said in a telephone interview earlier yesterday. “I’m not using company money. We’re working out an offer for the little guy.”

Calls placed to Curt Ritter, a spokesman for CIT, and Icahn after the deadline weren’t returned.

‘Ridiculous’

“It is ridiculous,” Egan said. “I don’t think the company is going to have time to be even able to organize a conference call among its directors let alone its attorneys in that period of time.”

At about the same time Icahn made the loan offer, CIT issued a statement that the investor has “misrepresented the fundamental economics of the company’s restructuring plan” and that it believes its plan “maximizes franchise value.” CIT’s short-term funding.

The company is seeking to exchange about $30 billion of debt for new securities by 11:59 p.m. on Oct. 29 or enter a pre- packaged bankruptcy. Peek said unsecured bondholders would get 6 cents to 37 cents on the dollar in a traditional bankruptcy.

“They have been using a variety of scare tactics to try to convince noteholders that a traditional bankruptcy -- or a ‘free-fall bankruptcy’ as the company calls it -- would be a disaster,” Icahn said in a letter addressed to “smaller” CIT bondholders.

Notes Fall

CIT’s $500 million of 4.125 percent notes due Nov. 3 fell 2.5 cents to 67 cents on the dollar as of 10:19 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds have fallen 13 cents since Oct. 1, when the restructuring plan was announced.

Icahn, who once targeted companies such as Texaco Inc. and Trans World Airlines Inc. and last year sought to take control of Yahoo! Inc.’s board after the Internet search company rebuffed a bid from Microsoft Corp., is also offering brokers and financial advisers $5 for every $1,000 of notes tendered for assisting clients in casting their votes in his favor.

CIT’s pre-packaged plan requires the approval of 50 percent of those voting, Icahn wrote in the statement. That means holders of “1 note or 1,000 notes” have the same vote in achieving the 50 percent, he wrote.

“Paying for votes to beat the CIT plan through numerosity only makes sense as a tactic when the vast majority of bondholders appear to want to accept a pre-packaged plan or an exchange offer, and reject the novel notion that value is maximized by a free-fall bankruptcy,” Jeffrey Werbalowsky, CEO of Houlihan Lokey Howard & Zukin and adviser to a bondholder group, said in a telephone interview.

“The ‘small guys’ the recent Icahn tender purports to assist are treated absolutely the same under the plan as everyone else, and protecting this class is simply a fig leaf to justify attempting to gerrymander the bankruptcy voting provisions,” he said.

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

Last Updated: October 28, 2009 11:31 EDT