Last Updated: April 10, 2008: 1:04 PM EDT
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Citi hits the private equity ATM

A proposed sale of loans will give the bank some much-needed cash - and perhaps give a shot in the arm to troubled debt markets.

By Roddy Boyd, writer

NEW YORK (Fortune) -- Citi's proposed sale of $12 billion in leveraged loans to some private-equity shops shows a bit of stability is starting to emerge in at least one corner of the battle-scarred debt markets.

The trade is a combination of virtue and necessity. For Citi (C, Fortune 500), the deal means an infusion of cash - arguably the most precious commodity in the world to a bank that has taken $23.9 billion in writedowns and losses in the credit collapse. The trade also jibes with chief executive Vikram Pandit's stated plan to shed $200 billion from the bank's still-swollen balance sheet. Shares were up modestly in midday trading Wednesday.

News of the deal comes a week before the bank's first-quarter earnings report. Analysts expect Citi to post a multibillion-dollar first-quarter loss, on trading-related markdowns of as much as $18 billion. Last quarter, Citi disclosed a $1.35 billion loss from leveraged loans. Depending on the marks on what it is selling now, the firm is almost certain to book another loss on leveraged loans in the second quarter. Meanwhile private equity shops TPG, Apollo Management and Blackstone Group (BX) get normally liquid securities at a discount to par.

Even so, Citi's deal isn't the clear signal of a market bottom that some commentators have been calling. Reuters reported Wednesday that Citi loaned money to the private-equity shops to get the trade done. Although the private-equity firms assuredly put their own capital at risk in the trade, the fact remains that Citi is swapping its own balance sheet exposure to the loans for exposure to the three private-equity firms.

At face value, this remains a worthwhile trade for Citi, as the leveraged loans likely consisted of a large amount of sub- and barely-investment grade debt, and the private-equity shops have a much better credit profile. But if Wall Street is looking for the beginning of the end of the credit crisis, this isn't it.

The Financial Times reported that the securities were valued at just below 90 cents on the dollar. Moreover, their risk - based on recent trading history - appears to be fairly limited, since trading values dropped to a little over 86 cents on the dollar in early February.

For TPG, a deal would be its second high-profile foray into the troubled financial sector this month, following on the heels of yesterday's decision to lead a $7 billion investment in reeling thrift Washington Mutual (WM, Fortune 500). Taken together, the investments appear to be the most concrete evidence yet seen that the wholesale credit market deterioration of the past six months is at least slowing.

Through much of the decade, the leveraged loan market was a favorite of hedge funds and brokers, given the loans' liquidity, stable pricing and attractive return characteristics when purchased with leverage.

The loans Citi traded represent the purest symbols of the easy-money years. With fee-rich leveraged buyouts all the rage, Citi guaranteed private-equity shops financing for their often sub-investment-grade deals. Last summer, however, the market collapsed, leaving over $150 billion in financing commitments stuck on the balance sheet of money-center banks.

While the deal is a strong sign of confidence in the leveraged loan market, Citi has much more work to do. The bank, according to its financial filings, had $43 billion in leveraged loans alone on its books at year-end. This deal, then, marks only the beginning of Pandit's belt-tightening. To top of page

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