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Citi’s Deal: The Unclogging of the System

The story here isn’t the fact Citi (C) is selling $12 billion of loans and what effect that has on its balance sheet and earnings. The story is that there actually is a buyer.

Citigroup had $43 billion worth of leveraged loans on its books at the end of the fourth quarter and is allegedly selling $12 billion of that to private-equity firms Apollo Management, TPG and Blackstone Group (BX).

This comes on the heals of a proposed plan at UBS (UBS) that would also either sell loans to investors or place them in a subsidiary to then spin.

The news here isn’t what the loans sold for (90 cents on the dollar) or what that might mean for the current quarter in term of write-offs to earnings. The news is that for the first time, someone is actually willing to buy the stuff. It was only a few months ago Citigroup issued dilutive preferred equity (See Washington Mutual for the latest round (WMU)) at near double digit interest rates to accomplish the same thing, restore liquidity to the balance sheet.

There were at that time no buyers for the loans as there seemed no bottom in sight to the write-downs.

If nothing else, we can now surmise that the values of these assets are now to the point that they are going to now have a market value to them based on what is now actually selling rather than the “model based” valuations we have been seeing. This will give the market some confidence as to how to value what is left.

Disclosure (“none” means no position):Long C, None

Todd Sullivan's- ValuePlays

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