Suitable Transaction for Both Citi and the Pe FirmsSuitable Transaction for Both Citi and the PE FirmsCitigroup needed to sell off its large loan exposure in 2007, but struggled to find investors willing to buy its leveraged loans and were willing to deeply discount the price received. The private equity firms took it as a great opportunity to earn equity-type returns from the leveraged loan industrys difficulties.
From private equity firms perspective, the Citigroup loan portfolio transaction allowed diversification, better financial performance, and higher lending volumes without any extra operational support. Private equity firms could earn 10% discount on the purchase of the loan portfolio from Citigroup at an attractive price of 90 cents on the dollar. The potential return should be higher than 10% since the loan prices would definitely increase given that large-scale buyers were stepping in. Private equity firms would gain profit if demand for the loans pushes prices above Citigroups discounted sale price. This transaction also enabled them to utilize capital levels that might otherwise be too high given the refinancing situation at that time.
The Citigroup loan portfolio transaction was well-financed because of the high returns from the lending of Citigroup’s loans. This was true, as it allowed private equity firms to achieve the potential return because of a loan-focused solution. In addition, it allowed small, stateless lenders to access greater efficiencies through their own debt modification. The results are clear. Large Stateless lenders are able to utilize more resources or less. This would create a financial asset class in which private equity firms in financial institutions can diversify by selling more loans at a lower discount than their peers, thereby further diversifying its assets.
The results are positive when you view the overall value of their loans. In fact, as their size decreases, so do the size of the Citigroup loan portfolio they are sold. It is hard to quantify the absolute value of their loan portfolio, but on average 20% of their collateral is sold off to the CIT as collateral. This puts CitIG within the range of the 10%-25% average cost of owning large-scale mortgage-backed credit card loans. This is just one example of the large scale lending that is occurring today. As the number of privately owned and controlled private companies grows, so too does the size of the financial infrastructure surrounding finance and capital markets. The scale of banks, banks and private equity firms can not only change the financial architecture of a large population of people, but also the shape of the financial system and its environment in terms of the financial futures and futures of the people involved.
The Citigroup loan portfolio transaction is a great example of a solution. The Citigroup loan portfolio transaction is a great example of a solution because it allows banks and private equity firms to diversify their financial assets without requiring any further external intervention. This was achieved by using loans from public banks, such as the National Association of Manufacturers and banks that own such banks, or from private banks that hold private stock, to help leverage more value in their loans. Private banks were allowed to take a greater share of Citigroup’s loans, giving them more leverage in their lending. While private banks held much larger percentages of Citigroup’s loans, they were given less power to take out loans from government-owned debt holders. This is true even in countries with public debt, such as the US, where an estimated 80% of private banks hold many of their borrowers’ private equity loans. It is also true that the total cost of the purchase of Citigroup’s personal finance and banking investments is about 50% higher than the total cost of owning private assets. Private banks are able to profit from this transaction, not because of these large discounts to their borrowers, but because it allows them to increase profitability for their partners by providing more capital through the sale of their private investments rather than by giving banks more leverage.
After the transaction, Citigroup would no longer have to mark down the original leveraged loans if their value fell further. From Citigroups perspective, it would also send a positive signal to the market that it confirmed the recorded values of other leveraged loans in its portfolio and turned over the shrinking situation of its balance sheet. It helped Citigroup not only remove or at least greatly reduce the risks that Citi might not wish to retain, but also to avoid having too little capital by transferring the loans off the balance sheet through the ownership shift. In other words, the sale of Citigroups leveraged loan portfolio allowed its balance sheet to maintain its full capacity. In addition, Citigroup expected coupon payments on the $7.8 billion debt from the private equity firms regardless of the leveraged loan default and could obtain a protection to claim the private equity funds assets if the funds failed to pay Citigroup additional collateral for the decrease of the value of leveraged loans.
Valuation CalculationThe present value of loan portfolio less the acquisition costs will provide the PE firms with an understanding of their gain on this sale. Multiple assumptions were necessary to determine the calculation, each varying in impact on the eventual valuation. Taking all assumptions and various sensitivity analyses into consideration, the deal does make sense relative to the assumptions listed. The net present value for private equity firms is slightly below $2 billion; the present value of the loan is slightly below $5 billion (see Appendix A). Given the worst case scenarios and variability, we still feel that this is a great investment due to the investment generating positive NPV given most scenarios.