HBS Project:
Blackstone and the Sale of Citigroup’s Loan Portfolio

Blackstone and The Sale of Citigroup’s Loan Portfolio

In the second half of 2007, the banking industry and financial market showed signs of considerable stress by raising the default rate of mortgage and the decline in the value of residential mortgage-backed securities. This had led to a re-pricing of many debt instruments. By the end of 2007, Citigroup declared that the fair value of its U.S. sub-prime related direct exposure could decline by 20%. This affected Citigroup’s financial results and would incur further losses in the future.

One of Citigroup’s main concerns was the risk of their exposure from holding leveraged loans. Due to the increasing risks and costs associated with holding these loans, Citigroup approached several large investors, including a private equity firm and a hedge fund, about purchasing leveraged loans from their portfolio. Blackstone expressed interest in a portfolio that contained a total face value of $6.11 billion, with16 different issuers. Blackstone, one of the world largest private equity firms, was reviewing materials for their potential purchase of a $6.11 billion pool of leveraged loans from Citigroup, one of the world’s largest banking entities. Most of these loans were used to finance large leveraged buyouts (LBOs). Citigroup would help the transaction by offering debt financing for the purchase of the loam, while Blackstone would offer the rest of the fund and take the first loss.

Does this transaction make sense for Blackstone?

Yes, this loan could be a bargain because historically loan prices have been traded at a par or above. Blackstone had previously done due diligences for many of the buyouts, giving Bennet J.Goodman, a Senior Managing Director at Blackstone, some degree of confidence. Considering its strong history, Blackstone is more