2008-04-29bloomberg.com

If the credit crunch really is close to ending, as Citigroup Inc. Chief Executive Officer Vikram Pandit says, then why is he offering below-market terms to rid the bank of some of its $26 billion in leveraged buyout loans?

Citigroup sold $8 billion of the debt to private-equity firms this month only after giving buyers $6 billion of financing at cheaper rates than it can borrow itself, according to people familiar with the transaction, who declined to be identified because the terms aren't public. Deutsche Bank AG and Royal Bank of Scotland Plc are also offering credit to buyers to help cut their holdings.

...

Banks escaped about $65 billion of LBO commitments in the past four months in part by lending money to private equity firms such Blackstone Group LP's GSO Capital Partners and Apollo Management Inc. Wall Street is getting rid of the debt individually, in packages or placing it into structures such as collateralized loan obligations, which pool loans and slice them into pieces with various ratings to sell to investors.

We wonder how much of these LBO garbage debt CLOs are now on the Fed's books. In other ways the "backlog clearance" is apparently not as good as it might appear at first blush:

Pandit, 51, was put in charge of Citigroup in December. He cut the firm's backlog in the first quarter by $5.5 billion to $37.7 billion, according to regulatory filings. It has since sold $8 billion with financing and $4 billion without, the bank said.

In some cases Citigroup provided private-equity firms with $4 of financing for every dollar of they invested, said people familiar with the terms.

Well that explains a lot. By our reckoning this sort of financing implies that Citigroup has taken on contingent exposure to the deals that it has supposedly sold off. No wonder leverage keeps going up.

The article also points out the margins on these financing deals are negative, relative to market rates Citigroup and other fast-bailing banks are getting on their borrowings. That would be another material problem.



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