Citigroup (NYSE: C) seems to have come up with a deal to sell over $12 billion in problem corporate debt, some of it likely from LBO transactions. The buyers are the astute private equity firms Blackstone (NYSE: BX), Apollo Management, and TPG.
The odd aspect of the transaction is that the portfolio is being sold for "an average of slightly less than 90 cents on the dollar," according to The Wall Street Journal. The firms doing the buying have reputations for being unusually adroit at making money. It would be safe to assume, then, that they think the paper is worth closer to 95 cents.
The news of the transaction shows that the sentiment about debt, especially debt which is only moderately impaired, has gone too far. The private equity firms are probably correct that what they are buying is worth more than they are paying. If so, Citi should keep the loans and take the write-down. The great pressure banks are facing should not put them in a position to leave money on the table. It is hard to see how their shareholders are helped by that.
Panic often makes for poor decisions. Citi has one in the making by dumping debt which has a fairly high inherent value.
Douglas A. McIntyre
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