Citi Summons LBO Vultures

The bank is reaching out to find buyers for First Data loans.
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Investment banks trying to unload LBO debt are looking for help from an unusual source: vulture investors.

Citigroup, a lead underwriter in the

First Data

(FDC) - Get Report

leveraged buyout, has been reaching out to find buyers for some $14 billion in bank loans, market sources say.

These people say the bank is trying to hit up hedge funds and collateralized loan obligations, which are regular buyers of bank debt. But it is also moving beyond that crowd to smaller investors who are looking to invest in distressed situations. Citi is dangling unusual terms as well, including offers of low-cost financing for loan buyers, the sources say.

Citi didn't immediately return a call seeking comment. But an investor who describes himself as a small fish in the distressed space tells the

TheStreet.com

that a Citigroup loan salesperson called to dangle some First Data loans.

The investor, who says he has some capital on the sidelines waiting for the right distressed investment, says he isn't sure he'll buy the loans. He says the loan salesperson offered leverage of four times what the buyer would pony up at a relatively reasonable rate.

Traditional bond investors such as loan funds typically eschew such borrowings, so the offer seems to indicate Citi is seeking out investors who might be lured by sweetened yields.

The news comes as the Citi-led underwriting group tries to move some $24 billion worth of securities behind Kohlberg Kravis Roberts' buyout of the credit card processor. As such, Citi is among the first Wall Street firms to confront the challenge of finding takers for some $300 billion worth of loans left over from the M&A boom that fizzled earlier this summer.

With investors still skittish about risky debt in the wake of the collapse of the mortgage securities market, Citi is under pressure "to figure out how to finance these purchases," explains a Wall Street hedge fund investor.

Potential buyers don't appear to be rushing to gobble up the First Data loans because of the deal's covenant-lite features, which give lenders less leeway in restructuring nonperforming credits. Interested buyers argue that although some of these leveraged loans are backed by solid companies, such as First Data, there is simply too much debt in place, given some buyout targets' cash flows.

As it stands, investors report that Citigroup has discussed a yield of the London Interbank Offered Rate plus 400 basis points, or around 9.75%. If reports of the liberal leverage offers are to be believed, a leveraged buyer could end up with a piece of paper that yields around 13%. That kind of return is relatively unheard of in the bank loan market, which offers investors secured paper and priority in the case of the company's default.

In the go-go days, pre-credit crunch, loans of similar credit quality had priced as low as Libor plus 225 -- around 8% at recent rates.

Some observers expect the banks to have to do some heavy discounting to compensate investors for a perception of rising risk.

"Anything less than a discount to 95 and a spread of 400 seems insufficient to me," says Michael Lewitt, president of Hegemony Capital Management, an independent financial advisory firm.

The investor contacted by Citigroup said the salesperson was soliciting his input on what pricing terms would make the deal palatable. Libor plus 450 would be more likely "priced to move," the investor says.

It's not unheard of for underwriters to offer little side dishes to investors to get a deal through the gate. But incentives tend to be a sign that the orders aren't piling up.

"These guys are desperate to get through this and get past bonus season without a debacle," says one market watcher.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click

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