Citigroup on the Right Track

Last night around 6pm I got a bunch of emails about the news on Citi that had just hit the tape. Hit the tape in case you were wondering, means that a news publication like the AP, The Wall Street Journal, Dow Jones or Reuters had just printed a headline story and it was running across the tape as a new headline story. The Wall Street Journal, owned by our parent News Corp, reported that Citi was close to a deal to sell roughly $12 billion dollars in leveraged loans to three private-equity firms, Apollo Group, run by a very famous man named Leon Black; TPG (otherwise known as Texas Pacific Group), which agreed yesterday to lead other investors in a $7 billion dollar cash injection for Washington Mutual by buying stock valued at $8.75 per share, well below where it was trading before the opening; and Blackstone Group, also run by a very famous man, Steve Schwartzman, who has seen his stock decline 47% since it’s public offering in June.

What is a leveraged loan? It is a loan that carries a high risk of default, therefore considered a riskier loan. These loans helped finance many of the biggest corporate takeovers. The biggest users of these loans were private-equity firms who needed to get capital on the cheap to buy beaten up companies. The great irony in all of this as reported by the New York Times this morning is that many of the sources of debt that these private-equity firms are buying today are debt that Citi lent to them to finance their own deals. Now they are reportedly buying them for less than 90 cents on the dollar. Not bad for both parties!

Why is this significant? Several important reasons:

1. Citi has as much as $43 billion dollars in leveraged loans on its books. They need to deleverage. Sell assets to raise funds. Reliquify to begin borrowing again.

2. For three of the largest private equity firms in the world to buy leveraged loans suggests two things. One, they have capital and they want to put it to work, and two, now that they are unable to buy companies and get the necessary financing, the debt market or leveraged loan market is becoming an investment option to make some money in a very difficult deal market. Both Blackstone and TPG have recently set up funds to buy distressed debt.

3. This on the heels of the Washington Mutual news yesterday, Lehman raising capital, the market shrugging off huge writedowns at UBS, and Thornburg not going bankrupt – all good signs for the market.

4. This is one in a string of steps that Citi’s CEO Vikram Pandit has made to shore up the balance sheet, sell assets, reshuffle the management team and cut dead wood. Many in the press have attacked him for not doing enough, not being as charismatic as they would like to be. Look at the list of major announcements (from Citi’s website) below since he took over the helm. This is a man on a mission! This doesn’t mean that Citi doesn’t have a lot more work to do. This is just the beginning of turning the ship around.