CIT Group Inc warned bond holders that if they failed to exchange their debt or approve a prepackaged bankruptcy, the commercial finance company -- and its debt investors' returns -- could suffer mightily.

The company said that without a debt exchange or an orderly bankruptcy, the company would have to liquidate, an expensive process that could leave unsecured bondholders with somewhere between 6 and 37 cents on the dollar. These bonds earlier on Friday were trading just above 60 cents on the dollar.

Let's be clear. A free-fall bankruptcy will ... result in a lower recovery for today's unsecured bondholder, CIT Chairman and Chief Executive Jeffrey Peek said in a pre-recorded webcast presentation.

CIT's restructuring plans were almost immediately slammed by billionaire investor Carl Icahn, who snapped up CIT debt in the past few months to become what he says is the company's largest bondholder.

CIT is trying to restructure its debt through getting debt holders to exchange their debt, or to agree to a pre-packaged bankruptcy. Once the company restructures debt, it can try to move some of its businesses into its regulated bank subsidiary and fund them with deposits instead of bonds.

Icahn said a better plan is to try to move businesses into the bank within nine months. If that does not happen, the company should wind itself down and pay out proceeds to debt holders. Icahn said that if the company pays off its debt with money from maturing assets, his bonds could be worth 80 to 85 cents on the dollar.

CIT would have you believe that a bankruptcy would be calamitous. We do not believe this to be the case, said Icahn, who made much of his fortune over the years buying controlling stakes in distressed companies.

Icahn has been increasingly active in companies in bankruptcy court this year. This summer, he was approved by a court to provide part of the bankruptcy financing for auto parts maker Lear Corp, a company he had once had a large equity position in and tried to acquire. He also received approval from a bankruptcy court to buy Tropicana Casino and Resort in Atlantic City.

NEW BOARD MEMBERS

CIT said that it is overhauling its board of directors, and that by the 2010 annual meeting, the slate of nominated directors will include no more than five of the current directors, and that the company is adding three new directors to bring its total to 13 from its current 10.

Peek is stepping down at the end of the year, the company said earlier this month. Many investors have criticized Peek for being too slow to recognize how weak credit markets and a slowing economy would squeeze the company's margins.

In addition to the new directors, CIT said it is planning to set aside more of its cash to repay maturing debt, instead of making new loans.

In slides, the company said that a filing that has not been approved by bondholders would increase the risk of a seizure of CIT Bank, increase the costs of bankruptcy and limit the company's ability to insulate valuable operating businesses.

CIT makes loans mostly to small and medium sized businesses and also has a large factoring business that services the retail sector.

(Additional reporting by Walden Siew and Joseph Giannone; Editing Bernard Orr)

Carl icahn