"Citi allows loan ‘cherry picking’"

As told in the Financial Times, LBO groups interested in buying leveraged loans on offer from Citi are able to select the assets they want, rather than buy pieces of the package, as Citi had planned.

I rarely take issue with the FT, but in this case, particularly in its choice of headline, the pink paper is being far too kind to Citi. A more accurate description would go something like: “Unable to attract sufficient interest in the $12 billion of loans it is trying to unload, Citigroup had no choice but to relent and allow the LBO firms to pick and choose among the loans. It’s a foregone conclusion that the big bank will be left with the worst assets.”

One of the oldest rules of dealmaking is that everything can be solved by price. It’s surprising that Citi couldn’t or wouldn’t lower its price sufficiently to attract offers for interests in the entire pool. As the FT story indicates, there is a lot of competing product, which puts Citi at a disadvantage. In addition, the bank appears to have parameters for how much it is willing to lose on certain types of deals. But is this any more sensible than a homeowner who refuses to sell a house for less than he thinks it is worth, even when the market has moved away from that price?

When funds or trading entities need to raise cash, they almost inevitably wind up selling their best holdings first. If they are lucky, they can right themselves without lowering the quality of their portfolio too much. Nevertheless, it’s a bad sign that Citi is taking steps that smack of desperation in such a public way.

From the Financial Times:

Citigroup is allowing private equity groups bidding for up to $12bn of its leveraged loans to cherry-pick from a wide range of assets with different prices and credit ratings – a move that could complicate Citi’s efforts to clean up its balance sheet.

People close to the situation said that, rather than selling the loans as a block, Citi was asking buy-out firms including Apollo, TPG and Blackstone to choose from a menu of leveraged loans used to fund at least seven major buy-out deals…

People familiar with the sale said private equity groups were likely to focus on loans linked to deals they knew well, while steering clear of those that were perceived as troubled or unlikely to recover. As a result, Citi might end up selling less than the $12bn it had originally targeted, they added.

News of Citi’s piecemeal approach comes as it emerged that Deutsche Bank has been trying to sell parts of its €36bn ($56bn) portfolio in leveraged loans to private equity groups since August.

Last year, the US unit of Credit Suisse sold off $20bn of its buyout financing. Goldman Sachs also has sold off large chunks of its portfolio of leveraged loans.

People close to the situation said that Deutsche was in discussions to sell €5-6bn of loans to Apollo Management, one of the most aggressive buyers of distressed debt, and Blackstone Group in a deal that involves the use of borrowed money from Deutsche Bank.