Could Citi's Deal Signal a Turnaround?

During this credit crunch, many banks have been looking to offload loans, but there have been few takers. Citigroup (C), however, seems to be close to a deal to offload $12.5 billion in leveraged loans. Many of these loans have been used to finance corporate takeovers. The potential buyers appear to be Apollo, TPG and Blackstone. Could this deal signal a turning point in the markets?

The twist of this deal though, is that some of these firms will merely be buying back their own debt at a discount. This would be like a home owner who borrowed money for a mortgage now being able to pay back only a smaller percentage of their loan if they pay it off at once.

Private equity firms that have struggled for financing for leveraged takeovers are now setting their sights on the troubled credit markets. If this deal is indicative of a longer-term trend, more of these firms could buyout their own or other’s debt and this could inject some much needed liquidity in the credit markets. Of course buying back your own loans at a discount is significantly different from buying loans from firms which may or may not be troubled. Only future loan buyout deals will tell if the bottom has been hit.

Comments

[ItsJustMe:]

The fact that Citi is going to take a loss of over $1 billion on short-term debt that was likely on their books at full value isn't what I would call a positive turning point for the banks. If their "good debt" is only worth 90 cents on the dollar 9 months after issue, then what does that say about the rest of their loan portfolio?

Yes, it increases their liquidity but at what cost? Not many borrowers will have the resources of those equity firms to buy back their debt at a discount so I see this as more a move of quiet desperation than a meaningful turnaround model for other banks...

2008 Apr 09 05:13 PM

[drmalaka:]

I am sure that having an additional $12bil on the balance sheet will help them survive. However; I do not think that taking a $1.3bil write down on debt which had yet to be written down is positive.

This is just further proof of how much trouble the banks are in. They are selling whatever they can find a market for and offering a discount.

2008 Apr 09 05:14 PM

[flatman:]

Did C get $12B or did they make a loan get the transaction done?

2008 Apr 09 06:05 PM

[euro:]

As I understand it, Citi is arranging financing for these guys to buy their loans back at a discount. Therefore it is more of a shell game than a sale.

2008 Apr 09 09:00 PM

[Desperate.:]

No is the short answer. When every amateur analyst stops calling a bottom, turning point or some other nonsense every time there is some news like this is about where the bottom will be.

2008 Apr 09 09:05 PM

[pochovilla:]

The patient is selling blood. What's next a kidney, lung, eye, arm and a leg? Only time will tell

2008 Apr 09 09:38 PM

[Andrew:]

It's probably true that C is financing the deal for the PE's to sell back the PE's own LBO debt. As many have done so here already, one can argue whether this is just more financial engineering to dress up City's balance sheet, and how much they had to pay for the privilege.

The flip side of the argument is that the PE's aren't obligated to do anything they don't want. They have now willingly taken on direct risk to these loans, where as the previous LBO loans were tied to the buyout with no recourse to the PE's.

To me, it seems like C paid 15-20% of face value (including loss of future interest) to upgrade from junk bond to BB on the $12B debt. Is it a smart deal for C?? We will have to see what the actual terms and which bonds? If PE's are just cherry picking off the top, then C will really be exposed with the LBO debt remaining in their portfolio.

2008 Apr 09 11:40 PM

[flatman:]

The hedge funds appear to be making a bet on government bailout of homeowners. Wouldn't it be funny if the bailout made them another round of billions iin profits.

2008 Apr 10 08:09 AM

[enrique:]

what loans are they selling? the good ones, implying they are keeping the crap...or are they selling the crap and keeping the good ones....or a blend.....i have not seen details but, to me anyway, that is one of the most important questions related to this transaction....

2008 Apr 10 08:39 AM