The showdown between CIT and billionaire investor Carl Icahn over the future of the troubled commercial lender stepped up a notch yesterday (10/27) with Icahn offering smaller bondholders debt protection if they agree to back his alternative restructuring plan.

Separately, Icahn offered CIT a last minute $4.5 billion loan identical to one the company is working out with Bank of America, but with lower fees. Icahn - who says his loan will save CIT more than $112 million -- reportedly threatened to sue the company if it chose to go through with a competing package from other bondholders.

CIT and Icahn have been battling it out in recent days through a series of letter, statements and press reports. On Oct. 19 Icahn -- who has been scooping up large amounts of CIT debt in recent months -- sent his first letter to CIT's board lambasting a planned $31 billion debt exchange with bondholders as "shameless" and offering his own $6 billion loan to pull the company from the brink of bankruptcy. CIT responded by amending the terms of the debt exchange to be more favorable to bondholders, and extending the deadline for a vote on the exchange until Nov. 5.

CIT - which has lost nearly $5 billion over the past two years -- has warned that failure to complete the exchange would force the company to liquidate, noting that its unsecured bonds would be worth somewhere between 6 cents and 37 cents on the dollar in this scenario.

The exchange offer -- and Icahn's resistance to it -- have led to a pitched battle of wills between the billionaire financier and CIT's board. In the latest salvo, Icahn has offered downside protection for smaller CIT Group noteholders if they are willing to support him in his opposition to the company's pre-packaged bankruptcy plan.

According to a release issued by the investor, the protection would take the form of a 30-day tender offer at 60% of par value. Through this offer, Icahn said he will essentially provide a free put option to small noteholders, assuring them a floor price in the event the notes trade lower, while allowing them to benefit if the notes trade higher.

Icahn said he believes that the pre-packaged plan being promoted by the company will result in the destruction of value at CIT and that he is seeking to "neutralize the variety of scare tactics designed by CIT to coerce noteholders into supporting the company's plan."

Yesterday (10/27) afternoon, seeking to "set the record straight," CIT issued a statement responding to Icahn's charges.

"Mr. Icahn is seeking to convince smaller bondholders to vote against the company's proposed restructuring plan now in exchange for his ill-defined promise that some of Mr. Icahn's unidentified 'affiliated entities' will eventually deliver on that vague promise," CIT said. "Mr. Icahn has also misrepresented the fundamental economics of the company's restructuring plan.

"CIT has worked together with a diverse group of bondholders in developing a comprehensive restructuring plan to position CIT for future success. The successful completion of either the exchange offers or plan of reorganization will generate significant capital and liquidity. CIT and many of its bondholders believe this plan maximizes franchise value. Importantly, under CIT's plan all bondholders within the same class, large and small, are treated equally."