Citigroup is seeking to gain control of more than $2 billion of CLOs, apparently in order to liquidate them and unwind related trades.
Over the past few months, the bank has been tendering offers for the riskiest portions of several synthetic CLOs it set up for asset management firms, including the Blackstone Group, Prudential Investment Management, Silvermine Capital Management and Invesco.
On Friday, Citigroup Global Markets tendered offers to purchase the junior-most securities of Skytop CLO Ltd., according to a statement distributed via Business Wire. Skytop CLO is managed by Invesco.
The tender comes on the heels of offers to purchase the junior-most securities of two other CLOs — Pro Rata Funding Ltd., which is managed by Crescent Capital Group, and Silvermine’s Endeavor Funding Ltd. — in August.
In July Citigroup Global Markets tendered offers to purchase any and all of several classes of subordinated securities issued by Blackstone’s Bryant Park CDO and Prudential’s Dryden VI-Leveraged Loan CDO 2004.
Citigroup spokeswoman Shannon Bell, reached by telephone on Friday, declined to comment on why the firm is tendering offers for equity in the synthetic CLOs.
However, the junior-most tranches of CLOs, known as the “equity,” typically come with voting rights because they are the first class of securities to sustain losses. So acquiring enough equity in the CLOs would put Citigroup in a position to liquidate them, subject to the terms of the deals.
Why would Citigroup want to liquidate the CLOs?
Unlike more typical CLOs that issue shares and use the proceeds to acquire a portfolio of syndicated loans, synthetic CLOs don’t hold the assets to which their returns are linked. Instead, these assets are purchased by a bank that passes along any returns — or losses — to holders of the CLO securities via a swap agreement.
Bell confirmed that the assets backing all of the CLOs Citigroup has tendered offers for are held by Citigroup. She said they are housed at Citi Holdings, the bank’s unit for assets it intends to dispose of. Citigroup provides the swap arrangements for the CLOs through its Citigroup Financial Products unit, according to ratings agency reports.
Here’s the description of the structure of Bryant Park CLO from a March 2006 New Issue Report published by Moody’s Investor Services:
“The issuer and Citigroup Financial Products, with a guarantee from Citigroup Global Markets Holdings, have entered into a total rate of return swap which references a portfolio primarily consisting of USD-denominated senior term loans, revolving credit facilities, loan participations, bonds, reference swaps, structure finance obligations and reference credit linked notes.”
According to the report, this portfolio is managed by BlackStone Debt Advisors.
Under the terms of the swap, Citigroup Financial Products will pay the total realized return of the reference portfolio on quarterly distribution dates, adjusted for fees and expenses, including funding and commitment fees, according to the Moody’s report. The issuer will reimburse the Citigroup Financial Products for any realized losses in the reference portfolio through redemptions of the eligible investments in the collateral account.
So acquiring control of the synthetic CLOs would allow Citigroup to unload assets currently held in its so-called "bad bank" and unwind related trades