Citi financing its $12 bln sale of loans: source

By Dan Wilchins- Analysis

NEW YORK (Reuters) - Citigroup Inc's (C.N: Quote, Profile, Research) plan to sell $12 billion of loans and bonds made to private equity firms is seen as a positive for the bank and the loan market, but the deal will leave the largest U.S. bank with exposure to those private equity firms even after the sale.

That's because Citi is financing much of the sale itself, according to a person familiar with the deal. It is lending some money to the private equity firms, which will combine it with some of their own money to purchase the debt.

Essentially, Citigroup is re-lending money, but on different terms. The new loans are obligations of the private equity firms, and Citi is selling the original loans to the firms at somewhere around 90 cents on the dollar.

"The bank still has some of the same risk, but they have a lot of equity in front of them, and it's not on their balance sheet anymore," said David Bailin, head of alternative investments at Bank of America, speaking at the Reuters Hedge Funds and Private Equity Summit. Bailin had no direct knowledge of the Citi deal.

After the sale, Citi would no longer have to mark down the original leveraged loans if their value falls further, a real possibility in the currently disrupted credit markets. It also allows the bank to confirm the recorded values of other leveraged loans in its portfolio.

"It demonstrates that there is a market for this paper," said Marshall Front, Chairman of Front Barnett Associates in Chicago, which owns about 450,000 Citi shares. "This whole process of credit unfreezing, which started with the Federal Reserve opening the discount window to investment banks, is beginning to play out."

The central bank said last month that it will allow investment banks to borrow from it directly, an unusual move designed to thaw frozen credit markets.

Loan markets greeted the news positively. Risk premiums on leveraged loans, or loans made to finance corporate buyouts, narrowed. One dealer said the news gives market participants comfort that banks may be moving closer to selling off their unsold loans.