Citi's Deal: Unclogging of the System

The story here isn't the fact that Citi (C) is selling $12 billion of loans and what effect that has on its balance sheet and earnings. The story is that there actually is a buyer.

Citigroup had $43 billion worth of leveraged loans on its books at the end of the fourth quarter and is allegedly selling $12 billion of that to private-equity firms Apollo Management, TPG and Blackstone Group (BX). This comes on the heels of a proposed plan at UBS (UBS) that would also either sell loans to investors or place them in a subsidiary to then spin.

The news here isn't what the loans sold for (90 cents on the dollar) or what that might mean for the current quarter in term of write-offs to earnings. The news is that for the first time, someone is actually willing to buy the stuff. It was only a few months ago that Citigroup issued dilutive preferred equity (See Washington Mutual for the latest round (WMU)) at near double digit interest rates to accomplish the same thing, restore liquidity to the balance sheet.

There were at that time no buyers for the loans, as there seemed no bottom in sight to the write-downs.

If nothing else, we can now surmise that the values of these assets are now at the point that they are going to have a market value to them based on what is now actually selling, rather than the "model based" valuations we have been seeing. This will give the market some confidence as to how to value what is left.

Disclosure: Long C.

Comments

[helplessobserver]

Sulllivan,
You are a great spin master on this one. The loans only midly stink, think what is lying below them, leverage buyouts loans worth thirty cents on the dollar. Oops!, I forgot about us helpless taxpayers.

[todd su]

helpless,

i make no opinion on what is below them because any assumption is just that. it is clear that for the first time buyers are emerging.

[User 176256]

There is always a market for any asset - it's just a question of price. What the Citi news didn't clearly state is that Citi is also backing up the first 20% of losses on these loans. And, to put the icing on the cake, Citi is financing part of the deal - which puts them on the hook for any defaults that occur in the PE firms that are buying this debt.

So, to sum up...Assets begin discounted by 30% and financing required to make it happen. As I said at the beginning - there is a market for any asset, it's just a matter of price.

[john haskell]

Leveraged loans have been trading since the beginning of the crunch in July. They just weren't trading at prices that banks liked, which is a different thing entirely.

As for "finding a buyer," it's always possible to find a buyer if you finance him. In fact that's how the homebuilding industry found buyers for the past 5 years. That worked well, so why not repeat the experience with leveraged loans?

[venividivici]

John Haskell great letter. That's the best laugh I had all day. Thanks mate.