Citigroup is one of the banks that will, at least temporarily, be left holding the bag after investors took a pass on the sale of $10 billion of loans at Chrysler’s auto unit for the company’s leveraged buyout. (The others include J.P. Morgan Chase, Goldman Sachs Group, Bear Stearns and Morgan Stanley.)
It’s the biggest chunk of paper forced on investment banks since debt- buyers decided last month to stop financing buyouts with easy terms. It isn’t good news for either the banks or the buyout firms. There will come a point, if we aren’t there already, when banks refuse to make new loan commitments. That’s because they’re too occupied getting rapidly- accumulating paper off their books. (The giant Alliance Boots deal in Europe also is now headed down the same path — though Citigroup doesn’t appear to have a primary role there.)
Chatter among investment bankers lately has focused on Citigroup, which is said to be clamping down especially hard on making new loans. Indeed, according too this story in the Financial Times today, Citigroup could pull the plug on financing for the buyout of EMI, which would be “suicidal” for its relationships with clients, the paper quotes one source.
Citi has the misfortune of having been involved in a lot of the buyout loans that have soured lately, including Allison Transmission, U.S. Foodservice, Dollar General and ServiceMaster. It also has a role in three of the coming megadeals that still need to be financed: First Data, TXU and Clear Channel Communications. Investors are taking notice. Citi’s stock is down 12% this year, even after it reported better-than-expected second-quarter earnings last week, compared with a 7% decline for J.P. Morgan’s stock.