Blackstone and the Sale of Citigroup’s Loan Portfolio Essay

886 Words May 11th, 2015 4 Pages
HBS Project:
Blackstone and the Sale of Citigroup’s Loan Portfolio

Blackstone and The Sale of Citigroup’s Loan Portfolio

In the second half of 2007, the banking industry and financial market showed signs of considerable stress by raising the default rate of mortgage and the decline in the value of residential mortgage-backed securities. This had led to a re-pricing of many debt instruments. By the end of 2007, Citigroup declared that the fair value of its U.S. sub-prime related direct exposure could decline by 20%. This affected Citigroup’s financial results and would incur further losses in the future.

One of Citigroup’s main concerns was the risk of their exposure from holding leveraged loans. Due to the increasing risks and
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Therefore, it is reasonable that prices will recover, which, in the long run, would benefit Blackstone.

Why is the Citigroup seeking to sell the portfolio of leveraged loan?

Citigroup’s leveraged loan exposure is composed of two main risks. First, holding these leveraged loans could be costly from a regulatory capital perspective because they hold a 100 percent risk weight. Citigroup would need $80 million of capital for every billion dollars of leverage loan. By selling these leveraged loans, Citigroup would reduce capital requirement. Second, a decline in the leveraged loan index (LCDX) value from 97 cents on the dollar to 92 cents on the dollar posed a $1.5 billion loss on its leveraged loan portfolio for the fiscal year ending on December 31, 2007.

Furthermore, Citibank did not intend to hold theses loans. Like many others, Citigroup had suffered unprecedented losses and was facing the prospect of having even more considerable losses. By selling these loans, the bank’s image was greatly improved.
3. Assess the purchase price using information on CDS spreads

A) Using historical recovery rates, what is the implied probability of default? What is the implied IRR?

The CDC spreads for six of the senior notes are given in exhibit 7 and they are 984.6 for Alltel, 893.75 for First Data, 1147.35 for Harrah’s, 3434.03 for Tribune and