Citigroup's LBO dance card proves too full

By Jonathan Keehner and Anupreeta Das-analysis

NEW YORK (Reuters) - Citigroup (C.N) has admitted to pulling up lame doing the leveraged buyout dance. Now it must prove the injury was more superficial than disabling.

Citigroup Inc Chief Executive Charles Prince famously told the Financial Times in July that with the leveraged buyout frenzy, "as long as the music is playing, you've got to get up and dance. We're still dancing."

That spirit has come at a steep price, the bank revealed on Monday, though some analysts said it may not be steep enough.

Citigroup estimated a 60 percent drop in third-quarter earnings, citing losses on its leveraged lending portfolio as a leading cause. The biggest U.S. bank by market value took a $1.4 billion pretax writedown on a total of $57 billion in leveraged loans as of the end of the quarter.

Banking analysts wondered if the bank had fully captured its troubles with these high-risk, high-reward loans made to unrated and junk-rated companies.

"Can Citi really know what the size of the write-offs should be?" said Punk Ziegel analyst Dick Bove. "All they know is they got a bunch of loans which they put on their books which were inappropriately underwritten in the first place."

Citigroup underwrote loans for such leveraged buyouts as First Data Corp, bought last month by Kohlberg, Kravis, Roberts & Co KKR.UL for $26 billion. Nearly $10 billion of term loans behind that deal were sold to investors last week for 96 and 97 cents on the dollar, according to Reuters Loan Pricing Corp.

Based on how that debt was discounted, a more reasonable writedown for the leveraged loan portfolio would have been about 5 percent, said Sean Egan of independent ratings company Egan-Jones, which would be twice what Citigroup did. He called the $1.4 billion writedown "light" given the portfolio size.

Yet Egan added that if the Federal Reserve cut rates again, Citigroup would have an easier time exiting its loan exposure.

"There is a fair amount of uncertainty because of shifts in the rate environment," he said.

MORE TO COME?

On a recorded call, Prince said the bank took writedowns on all highly leveraged loan commitments where there were losses, but acknowledged the bank continued to sort through the loans.

"We continue to actively renegotiate and restructure the transactions to ensure they are executed at optimal terms," he said.

Activity on leveraged finance desks soared in recent years as frothy debt markets fueled by low interest rates sparked an unprecedented private equity buyout boom.

Private equity firms, which snap up companies with mostly borrowed money, have done $700 billion of deals this year, or double the level last year, according to data provider Dealogic.