| NEW YORK
NEW YORK Citigroup Inc (C.N) is offering partial financing to bidders for its CitiFinancial unit and is open to retaining a stake in the consumer finance business as well, several sources familiar with the deal said.
These concessions to potential buyers show how hard Citigroup will have to work to shed the $359 billion of problem assets and peripheral businesses that are still on its balance sheet. The CitiFinancial business has a book value of about $2 billion, and comes with some $13 billion of assets.
Citigroup is looking to sell the business without taking losses, unlike insurer American International Group Inc (AIG.N), which last year sold its consumer finance business at a loss.
Citigroup is working on ways to help buyers finance the deal, including offering to arrange the necessary loans and bond offerings, one of the sources said. But it is not yet clear what the bank will ultimately do, the source said.
Bidders for the business include a handful of groups consisting of more than 10 private equity firms, sources said.
Citigroup is looking to shed CitiFinancial because the unit focuses on lower-income borrowers in North America. Citigroup considers its target retail customers to be wealthy people, globally.
The $359 billion of assets that Citigroup is looking to shed are far less than the $600 billion of bad assets that the bank had on its books at the end of March 2009 but still represent about 20 percent of Citi's overall assets.
Some investors fear that as the company sells what it can from Citi Holdings, it will be left holding the most toxic assets.
Any buyer would have to find ways to fund CitiFinancial's assets through various types of debt and equity.
Making a structure work would be even harder for private equity bidders, who cannot borrow money as cheaply as a bank. Private equity buyers also aim to generate returns of more than 20 percent a year on assets, well above the levels that a typical bank will earn.
The market for asset-backed securities, a form of secured borrowing in which loans are essentially bundled into bonds and sold to investors, is likely to be one way to finance some of the assets. Citigroup is offering help there, sources said, adding that other banks could provide such financing as well.
But that would still leave a large funding gap that would have to be financed through other means such as term loans and high-yield debt, the sources said.
Some sources said it would be possible to raise the funds. If successful, tapping so many debt markets to finance the deal -- from junk bonds to asset-backed securities -- would reflect just how far the credit markets have come since the financial crisis.
PRIVATE EQUITY BIDDERS
CitiFinancial has attracted a Who's Who of private equity firms, with at least four groups weighing offers.
Private equity firms Warburg Pincus LLC WP.UL and KKR & Co LP (KKR.N) are in one group, and have aligned with Spain's Banco Santander (SAN.MC) and BlackRock Inc (BLK.N), sources said.
Two sources said the Spanish lender would come in as an investor in a new company along with the other firms, but another source said Santander was not interested in a bid.
Brysam Global Partners, Blackstone Group LP (BX.N), Carlyle Group CYL.UL, Thomas H. Lee Partners THL.UL and Wilbur Ross' WL Ross & Co are in another group, sources said.
Brysam is run by former Citigroup executives, including former COO Robert Willumstad and former Global Consumer Group CEO Marjorie Magner, who know CitiFinancial well.
Other bidding groups include: Apollo Management APOLO.UL and J.C. Flowers; and Clayton Dubilier & Rice and Onex CorpOCX.TO, the sources said.
The situation, however, is still fluid and the groups could move around, one of the sources said.
The auction process is in the second round and a deal is not imminent, with one source saying two or three teams could make it to the next round.
Citigroup, Santander, TH Lee, Apollo, Onex, Blackstone, Carlyle, Brysam and Warburg declined to comment, while BlackRock and the rest of the private equity firms did not immediately respond to requests for comment.
The sources are anonymous because these talks are not public.
Citigroup shares were up 2.7 percent at $4.64 during afternoon trading on the New York Stock Exchange.
EASING THE BURDEN
Buyout shops have been eyeing U.S. consumer finance assets, looking to take advantage of a shrinking supply of consumer loans to people with credit problems as firms like Citigroup exit the market.
But these businesses are harder to run for firms that do not own banks and so do not have access to cheap funding.
Last year, AIG sold most of American General Finance to Fortress Investment Group (FIG.N) at a deep discount.
Citigroup has been asking for at least book value and is trying to make a deal easier for bidders. It held back billions of dollars of toxic CitiFinancial assets to reduce the size of the deal and make it more attractive to bidders, sources have said.
Citigroup has been meeting with bidding groups in recent days and has offered ideas on how they could come up with funding for the assets, the sources said.
Like AIG, which kept a 20 percent stake in American General Finance, Citigroup could also retain a minority stake in CitiFinancial if needed, sources said.
Retaining a minority equity stake would reduce the amount of funds a buyer would have to assemble, while allowing the U.S. bank to better align its interests with the buyer and perhaps obtain a higher price, sources said.
Citigroup has also been positioning the business for sale. Last summer, it said CitiFinancial would shut 330 of its U.S. branches and cut between 500 and 600 jobs. CitiFinancial has 1,500 U.S. branches and will be renamed OneMain Financial in the summer, according to its website.
(Reporting by Paritosh Bansal and Megan Davies; additional reporting by IFR's Stephen Carter, editing by Matthew Lewis and Gerald E. McCormick)