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April 11, 2008

Citi in $12bn loan sale to private equity

by Dave Nixon

Story link: Citi in $12bn loan sale to private equity

Citigroup is approaching a transaction to sell $12bn in leveraged loans at a reduction to a group of leading private equity firms, marking another stride in new chief executive Vikram Pandit’s efforts to reduce in size the under pressure bank’s balance sheet.

Although details of the deal were still being formulated, people familiar with the matter said Apollo Management, the Blackstone Group and TPG would buy the loan portfolio at a discount that could come in at about 90 cents on the dollar.

The Citi portfolio includes loans used to finance acquisitions by Apollo, Blackstone and TPG, as well as debt in their rivals’ deals. Apollo would buy about half the portfolio, with Blackstone and TPG taking the rest. Citi declined comment.

The deal was being discussed in the midst of predictions that the market for leveraged loans, which are used to finance private equity transactions, could be stabilizing. The first quarter was the most terrible on record, with prices for leveraged loans falling 5.74 per cent, according to the S&P/LSTA Leveraged Loan Index.

John Mack, Morgan Stanley chairman and chief executive, said on Tuesday he believed a turn round was in sight and his bank would consider buying leveraged loans because of their eye-catching prices. Last week, Kohlberg Kravis Roberts also signaled its resolve to wade more aggressively into the market.

The cautious plan for the Citi leveraged loan portfolio is to disclose the sale next week at about the same time as the bank reveals its first-quarter earnings. The timing could give Citi a prospect to put a positive spin on what is expected to be a depressing earnings announcement.

Analysts polled by Reuters expect Citigroup to report a loss $0.81 per share, reflecting writedowns on leveraged loans and mortgage-backed securities.

“We are starting to see things improve as inventory starts to move,” said the partner responsible for financial investments at a leading private equity firm. “With each markdown and sale, they are putting the pain behind them and the problems are starting to get fixed.”

Both Blackstone and TPG recently established funds to buy debt, while Apollo has a long history of buying up distressed debt.


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