After the monsoon of problems and bad news that has poured from Citigroup (NYSE:C) lately, there is finally some good news for the beleaguered bank and the credit markets in general. Citi is closing in on a sale of $12 billion of leveraged loans and bonds to a consortium of private equity firms. The deal helps Citi remove some of the risky debt from its balance sheet, and shows that the credit markets may start to thaw.
Thawing the Credit Market
The Wall Street Journal reported on its website Tuesday night that Citi is close to a deal to sell $12 billion dollars worth of its loans to a group of buyout firms including, Apollo Management, TPG and Blackstone Group (NYSE:BX). The deal is significant for Citi and the market as a whole. The most recent numbers show that there are about $120 billion in leveraged loans unsold and outstanding in the market, and about $43 billion of those belong to Citi. This deal represents 10% of the total number of loans in the market, and helps Citi to reduce its own exposure by nearly 28%.
These loans have been essentially frozen on the balance sheets of banks, as deals to sell them have fallen apart in the shaky credit environment. Since Vikram Pandit became Citi's CEO, he has stated that unloading the banks risky assets, i.e. leveraged loans, is one of the top priorities. Shares of Citigroup were up on the news of the loan sale. (To learn how to break down a bank's complicated balance sheet, check out Evaluating A Company's Capital Structure and Analyzing A Bank's Financial Statements.)
The price is also attractive compared to what could have been feasibly expected. The buyout firms are expected to pay an average of just under 90 cents on the dollar for the loans. Considering that write-downs for some loans have gone to 50 cents or lower, this is a positive sign. All the information is not in yet, so it is not known which specific loans are being sold. According to Standards & Poor's, the most traded loans in February of 2008 went for an average 86 cents on the dollar. The write-downs so far have been a lot of theoretical losses. If this deal is on risky debt and the credit markets start to unlock a little, the market might realize that some of those write-downs were overdone and write-ups could actually occur.
Other Positive News for Financials
On April 8, 2008 Washington Mutual (NYSE:WM) reported that it is raising $7 billion in capital through the sale of stock. WaMu was down on the news, since this will be dilutive to the company's shares, but at least the necessary capital is being raised. As a result Moody's (NYSE:MCO) stated that it will not lower its credit rating of WaMu.
Unrelated to WaMu, Fitch Ratings announced it was downgrading $4.9 billion in mortgage bonds, citing lower expected repayments of home loans, including bonds from Morgan Stanley (NYSE:MS) and JPMorgan Chase (NYSE:JPM). Both stocks were slightly down after the news, but the ratings agencies have been late to the game, so news like this was already priced into the stock. I think positive news about WaMu's ratings having not changed is much more important at this point.
All the bad news seems to be priced into the financials, so I think the positive news from Citi and the fact that all the banks have been securing the capital they need are the real headlines. Pressure will likely remain on the financial sector, but I think a lot of the dilutive capital raising should be through. If more news of sales of risky loans hit the markets, it will certainly be a sign that the credit markets are easing.
The Bottom Line
Citigroup is close to selling more than a quarter of its leveraged loan portfolio, for the not too shabby price of close to 90 cents on the dollar. With how locked the credit markets have been, this is a very positive sign for the financial companies who have been unable to sell debt, and instead have been forced to write down the assets furiously. Pressure will likely remain on many financials, and the dilutive effects of capital raising will continue to drag on shares, but if the banks are able to start selling their loans it will be a very positive sign.
For an overview of the credit freeze, check out The Fuel That Fed The Subprime Meltdown.