CITIGROUP Inc is in talks to sell US$12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc as part of an effort to shrink the bank's balance sheet, a source said yesterday.
A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who declined to be identified because negotiations are private.
The loans are part of the US$43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard-to-sell assets.
Citigroup plunged 19 percent in New York trading this year, partly on concern that writedowns of leveraged loans, which currently trade at about 90 cents on the dollar, might add to US$24 billion of losses the bank has taken so far.
Chief Executive Officer Vikram Pandit is shedding high-risk holdings to shore up capital. "As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans," William B. Smith, senior portfolio manager at New York-based Smith Asset Management Inc, told Bloomberg News. "There's now a consortium of private-equity firms saying what they're worth."
Citigroup fell two percent to US$24.30 in German trading yesterday. The company's so-called Tier 1 capital, the core measure of solvency demanded by regulators, was 7.1 percent by December 31, down from 8.6 percent a year earlier. A "well-capitalized" bank must have a ratio of Tier 1 capital to assets of at least six percent, according to industry rules.
Citigroup had about US$2.2 trillion of assets at the end of 2007, more than any United States bank. Citigroup, Apollo, Blacksgtone and TPG declined to comment.
The leveraged loan market seized up last year after losses on mortgage bonds prompted fixed-income investors to shun assets deemed risky. Leveraged loans are made to companies with credit ratings below investment grade, meaning they're considered by Moody's Investors Service and Standard & Poor's to carry a higher risk of default.
Citigroup is planning to complete the sale to Apollo, Blackstone and TPG as soon as next week, when the bank reports first-quarter results, the person briefed on the talks said.
Clearing backlog
The deal may help clear the US$200-billion logjam of unsold loans, said Chris Taggert, an analyst at CreditSights Inc in New York. Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them, he said.
"It would definitely raise loan prices given that large-scale buyers are stepping in," Taggert said.
Apollo, Blackstone and TPG stand to profit if demand for the loans pushes prices above Citigroup's discounted sale price, the Financial Times reported.
The most actively traded leveraged loans, which fetched 100 cents on the dollar as recently as last June, fell to a record low of 86.28 cents in February, according to data compiled by Standard & Poor's. Prices have since rebounded to 90.14 cents as banks reduced their backlog of unsold loans.
Citigroup is poised to dispose of more than US$200 billion of the company's assets, which increased by almost US$700 billion from 2005 through until 2007.