Citibank Case Study

878 Words 4 Pages
Register to read the introduction… Citigroup’s leveraged loan exposure is composed of two main risks. First, holding these leveraged loans could be costly from a regulatory capital perspective because they hold a 100 percent risk weight. Citigroup would need $80 million of capital for every billion dollars of leverage loan. By selling these leveraged loans, Citigroup would reduce capital requirement. Second, a decline in the leveraged loan index (LCDX) value from 97 cents on the dollar to 92 cents on the dollar posed a $1.5 billion loss on its leveraged loan portfolio for the fiscal year ending on December 31, 2007.

Furthermore, Citibank did not intend to hold theses loans. Like many others, Citigroup had suffered unprecedented losses and was facing the prospect of having even more considerable losses. By selling these loans, the bank’s image was greatly improved.
3. Assess the purchase price using information on CDS spreads

A) Using historical recovery rates, what is the implied probability of default? What is the implied
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4. In which valuation approach do you have more confidence? Why?

We have more confidence in the valuation that has a CDS on the loan since it will make our investment nearly riskless. We can better predict our future cash flows which allow us to paint a more accurate picture for valuations. Without the insurance, the potential outcomes can vary and cause our cash flows to be unstable and less predictable. We prefer having the known cash flows which still allow us to be profitable and have a positive IRR.

5. Based on your calculations, how attractive is this deal to Blackstone?

This deal seems to be very attractive regardless if the CDS is purchased or not. Blackstone also seems to have done their due diligence as it has done previous investments which had good track records of performance. Both valuations returned a positive IRR, which means the cash inflows will be high than the cash outflows for the time horizon of the investment. Without out the CDS, the IRR was 16.75% and with the CDS the IRR was 19.44%. The only consideration Blackstone would have and was not touched on in the case, is what other options or investments were open to Blackstone at that time. Blackstone had to invest $5.07 billion, could Blackstone have invested this else

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