Blackstone and the Sale of Citigroup's Loan Portfolio
BLACKSTONE
AND THE SALE OF
CITIGROUP’S
LOAN
PORTFOLIO
Market Conditions (I)
• Corporate credit expansion in the U.S. between 2001 and the first half of 2007 was driven almost exclusively by the inflow of institutional (non-bank) funding into the syndicated loan market.
• The participation of a wide range of institutional investors
(including structured funds known as collateralized loans obligations (CLOs), hedge funds, mutual funds, pension funds, and insurance companies) in the corporate loan market was facilitated by loan syndication.
• In general, institutional investment in loans tended to concentrate in the leveraged segment of the market; i.e., loans to non- investment-grade firms or non-rated firms with high committed or outstanding leverage including financings of LBOs.
• In 2007, institutional investors funded 62% of primary leveraged loan issuance. That same year, leveraged lending represented 41% of the overall syndicated loan issuance.d
Market Conditions (II)
• According to Standard & Poor’s, CLOs represented 63% of all institutional investors in the primary loan syndication market.
• But after nearly a decade of phenomenal growth, in the third quarter of 2007, all structured finance markets collapsed.
• The reputation of securitization was severely damaged after most of the existing mortgage-backed securities (MBSs) and
CLOs were downgraded.
• Meanwhile, as of September 30, 2007, Citigroup alone had $38 billion of unfunded commitments that it underwrote in expectation of being able to allocate to
CLOs and other institutional investors.
• So even in early 2008, one could anticipate that the disruption in the leveraged loan market was unlikely to be short term. Furthermore, because securitization was an essential driver behind banks’ business expansion
Market Conditions (III)
• Banks had to fund several billions of bridge loans
• New loans to large borrowers fell by 64% during the first quarter of 2008 relative to the peak of the credit boom
AND THE SALE OF
CITIGROUP’S
LOAN
PORTFOLIO
Market Conditions (I)
• Corporate credit expansion in the U.S. between 2001 and the first half of 2007 was driven almost exclusively by the inflow of institutional (non-bank) funding into the syndicated loan market.
• The participation of a wide range of institutional investors
(including structured funds known as collateralized loans obligations (CLOs), hedge funds, mutual funds, pension funds, and insurance companies) in the corporate loan market was facilitated by loan syndication.
• In general, institutional investment in loans tended to concentrate in the leveraged segment of the market; i.e., loans to non- investment-grade firms or non-rated firms with high committed or outstanding leverage including financings of LBOs.
• In 2007, institutional investors funded 62% of primary leveraged loan issuance. That same year, leveraged lending represented 41% of the overall syndicated loan issuance.d
Market Conditions (II)
• According to Standard & Poor’s, CLOs represented 63% of all institutional investors in the primary loan syndication market.
• But after nearly a decade of phenomenal growth, in the third quarter of 2007, all structured finance markets collapsed.
• The reputation of securitization was severely damaged after most of the existing mortgage-backed securities (MBSs) and
CLOs were downgraded.
• Meanwhile, as of September 30, 2007, Citigroup alone had $38 billion of unfunded commitments that it underwrote in expectation of being able to allocate to
CLOs and other institutional investors.
• So even in early 2008, one could anticipate that the disruption in the leveraged loan market was unlikely to be short term. Furthermore, because securitization was an essential driver behind banks’ business expansion
Market Conditions (III)
• Banks had to fund several billions of bridge loans
• New loans to large borrowers fell by 64% during the first quarter of 2008 relative to the peak of the credit boom