July 14 (Bloomberg) -- CIT Group Inc. bondholders should cut their holdings because another infusion of taxpayer funds won’t be enough to save the century-old lender, according to debt research firm CreditSights Inc.

“Even if CIT receives another round of support, we believe bondholders are not out of the woods,” David Hendler, an analyst at CreditSights in New York, wrote in a report late yesterday. “We believe CIT’s funding model is broken and have our doubts over whether an additional capital injection would cure the problem.”

CreditSights recommends investors “underweight” CIT securities, meaning they should own a smaller percentage in their portfolios than the amount in their benchmark index.

New York-based CIT became a bank in December to get a federal bailout and received $2.33 billion from the U.S. Treasury. The lender, which faces $10 billion in maturing debt through next year and hasn’t had access to the corporate bond market in over a year, hasn’t been able to get approval to use the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program.

The FDIC hasn’t been willing to grant CIT access to the program on concern that backing the lender’s bonds would put taxpayer money at risk, a person familiar with the regulator’s thinking said yesterday. The FDIC remains in discussions with CIT about how the lender could improve its financial position to get access, the person said.

Capital-Market Prospects

“Should CIT receive an additional round of support, we believe it is unlikely that the capital markets would open up to the company,” Hendler said. “Even if CIT receives support from the government so that it can continue to lend, how does it fund new originations economically?”

A Wall Street Journal report said that U.S. officials are “in advanced talks” about aid for CIT, citing unidentified people familiar with the matter and without elaborating.

Hendler said in the report that he doesn’t think CIT poses a systemic risk to the U.S. economy and that he doesn’t think the government will want to bail out a finance company that is contracting its loan book.

“CIT has been using its position as a major middle-market lender to 760 manufacturing clients and as many as 300,000 retailers for the justification of why it should receive support from the government,” Hendler wrote. “We question this logic, as CIT represents a relatively insignificant amount of the overall U.S. retail volume.”

CIT’s lending supports less than 1 percent of U.S. retail and manufacturing businesses, according to CreditSights.

“Even if the FDIC steps up with a support package, we believe it could come with conditions of additional bondholder concessions including coercive bond-exchange offers,” Hendler wrote.

To contact the reporter on this story: Caroline Salas in New York at csalas1@bloomberg.net

Last Updated: July 14, 2009 12:46 EDT