July 22 (Bloomberg) -- Pacific Investment Management Co., Centerbridge Partners LP and the four other bondholders that put up $2 billion in financing for CIT Group Inc. made an instant $100 million on an investment analysts say is almost risk free.

CIT, the 101-year-old commercial lender struggling to retire $1 billion of debt maturing next month, agreed to pay a 5 percent fee to the creditors and annual interest of at least 13 percent. On top of that, the New York-based company pledged assets worth more than five times the amount of the loan as collateral.

“The terms are egregious,” said Dwayne Moyers, the chief investment officer at Fort Worth, Texas-based SMH Capital Advisors, which oversees $1.4 billion, including more than $70 million of CIT bonds. “They ripped the faces off everyone with these terms.”

CIT, led by Chairman and Chief Executive Officer Jeffrey Peek, said in a regulatory filing yesterday that the loan doesn’t solve the funding challenges and it may be forced to seek bankruptcy protection unless holders of $1 billion in floating-rate notes due Aug. 17 accept 82.5 cents on the dollar for the debt.

The securities fell 2.7 cents to 82.6 cents on the dollar as of 4:36 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The company’s $500 million of 4.125 percent notes maturing in November fell 7 cents to 61.5 cents on the dollar, Trace data show.

CIT shares fell 11 cents to 87 cents in New York Stock Exchange composite trading.

Baupost, Oaktree

Besides Newport Beach, California-based Pimco, the manager of the world’s biggest bond fund, and Centerbridge of New York, the debt holders providing the financing are Boston-based hedge fund Baupost Group LLC, Capital Research & Management Co. of Los Angeles, Oaktree Capital Management LLC and Silver Point Capital LP in Greenwich, Connecticut, people familiar with the deal said. London-based Barclays Plc is arranging the funding.

Howard Marks, chairman of Los Angeles-based Oaktree and spokespeople for Silver Point, Capital Research and Barclays, declined to comment. Officials at Baupost, Centerbridge and Pimco didn’t return calls seeking comment.

“The board of directors believed it was in the best interest for all stakeholders,” Curt Ritter, a CIT spokesman, said of the financing. He declined to comment on the terms of the loan.

General Electric’s Offer

CIT rejected over the weekend a General Electric Co. offer of at least $2 billion in loans backed by aircraft, four people familiar with the matter said. While less costly and requiring less collateral than the loans from bondholders, funds wouldn’t have been available until July 31, said two of the people, who didn’t want to be identified because the offer wasn’t public.

CIT gave details on the rescue funding in the regulatory filing. The company, which has lost $3 billion in the last eight quarters, also said it expects to report a $1.5 billion loss for the second quarter.

Bondholders made $2 billion available immediately and promised another $1 billion by the end of the month. The group received a 5 percent commitment fee on the 2 ½ year loan, amounting to $100 million on the $2 billion already provided. They will receive a 1 percent annual payment on the amount that’s not drawn upon, the company said.

Collateral’s Book Value

The book value of the collateral must be more than five times the amount of the loan and the so-called fair value must be more than triple the debt, the filing said. If CIT wants to retire the loan early, it must pay a 2 percent exit fee in addition to a prepayment premium of 6.5 percent on the amount it wants to reduce, the filing said. The 6.5 percent will decline to zero over 18 months.

Interest will be set at 10 percentage points more than the London interbank offered rate, which will have a floor of 3 percent. Three-month Libor was set at 0.502 percent today.

Even if CIT fails, the bondholder group will probably make money because of the collateral, according to Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. The lenders have “virtually 100 percent assurance” they’d be able to recoup all their money in a bankruptcy, said Sameer Gokhale, an analyst with Keefe Bruyette & Woods Inc. in New York.

‘Don Corleone Financing’

“This is called Don Corleone financing,” Egan said, referring to the patriarch in the organized-crime family depicted in the 1972 film, “The Godfather.” “You can’t lose money on this deal.”

Outside of the “urban underworld,” Egan, 52, said he couldn’t recall seeing a loan backed by as much collateral that paid interest rates so high. “These terms would make a pawn- shop operator blush.”

Bankruptcy loans arranged this year have an average interest rate of 7.25 percentage points more than Libor, compared with 5.3 percentage points in 2008, Bank of America Merrill Lynch analysts led by Jeffrey Rosenberg wrote in a report last month. So-called debtor-in-possession loans never exceeded 4 percent over Libor before that, they said.

The most actively traded high-yield loans had an interest margin of 6.1 percentage points over Libor as of July 21, according to Standard & Poor’s LCD unit. High-yield, or leveraged, loans are rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P. CIT’s senior unsecured debt is rated Ca by Moody’s and CC by S&P.

The rescue package offers CIT time to avert a bankruptcy, said Renee Dailey, a partner at Bracewell & Giuliani LLP in Hartford, Connecticut. The company said yesterday that $7 billion in unsecured debt comes due through June 30.

Risk of Failure

CIT hasn’t been able to sell corporate bonds in more than a year and has been denied access to the Federal Deposit Insurance Corp.’s program to issue government-backed securities. It turned to bondholders after failing to win U.S. government assistance.

“The new money does provide the company another chance to avoid a bankruptcy filing and generally a bankruptcy means destruction of value,” Dailey said.

CIT’s floating-rate notes due in August have climbed from a record low of 70.5 cents at the end of last week.

The company 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.

Exxel Outdoors Inc. is “scrambling” to find alternative funding because of CIT’s difficulties, Harry Kazazian, chief executive officer of the Haleyville, Alabama-based maker of sleeping bags and tents, said yesterday.

Dunkin’ Brands

A failure of CIT would also lessen financing options for franchisees of Dunkin’ Brands Inc., owner of the Dunkin’ Donuts and Baskin-Robbins chains, Michelle King, a spokeswoman for the Canton, Massachusetts-based company, said in an e-mailed statement last week.

Microsoft Corp., the world’s largest software maker, said it plans to work with a number of financial institutions after ending its agreement with CIT. Customers that already used CIT to pay for Microsoft products will continue to get financing from the lender, Stacie Sloane, a spokeswoman for the Redmond, Washington-based company, said in a statement.

The software company had signed an exclusive agreement with CIT beginning in France and Switzerland in 2006, and expanded the deal to other countries in 2007. Microsoft declined to say how much financing is provided to customers.

‘Ironclad Deal’

Bondholders that didn’t participate in the rescue financing may fare worse in a CIT bankruptcy because so much of the assets are pledged as collateral, said Adam Cohen, founder of debt research firm Covenant Review LLC in New York.

“As a CIT unsecured bondholder you’re better off than you were on Friday, but if they go into bankruptcy you’re not going to be too happy other holders jumped ahead of you,” Cohen said.

SMH Capital’s Moyers said he doesn’t expect the company to file for bankruptcy. If it does, bondholders will try to reclaim assets backing the loan, he said.

“Cost, when you’re on the verge of filing for bankruptcy, becomes less of an issue,” said Mike Taiano, an analyst with Sandler O’Neill & Partners LP in New York. “It’s a pretty ironclad deal from the lenders’ perspective, given the amount of assets that are behind it as well as the rate and fees they’re getting.”

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

Last Updated: July 22, 2009 16:49 EDT