Monday, February 8, 2010

Ailing securitisation market hits Citi asset sales

Original posted in the Financial Times by Francesco Guerrera, Henny Sender and Aline van Duyn:

The securitisation market’s failure to recover from its slump during the crisis is complicating efforts by Citigroup and other troubled financial groups such as AIG to sell unwanted assets and repair their balance sheets, bankers and executives say.

People close to the situation said that Citi had opened talks with private equity groups and hedge funds over the sale of $3bn-worth of car loans as part of its efforts to cleanse its balance sheet of billions of dollars in troubled assets.

To make the business more attractive, Citi is believed to have offered to provide the buyers of the loans with finance for a few years after the sale.

Bankers said that the initial response from potential bidders had been encouraging.

Some of the Citi loans have already been securitised under the term asset-backed securities loan facility (Talf), a US government programme aimed at supporting the ailing securitisation market.

However, some private equity groups and hedge funds that have looked at the assets said that the lack of a thriving market for securitised bonds, which are backed by cash flow from loans, made the assets less attractive. They added that the absence of a fully functioning securitisation market increased the uncertainty over how buyers could fund the loans once Citi’s credit facility expired.

“Private equity can’t make a bid on anything where the business model requires a bet that the external funding markets and securitisation comes back,” said the head of capital markets at a big private equity firm.

Citi declined to comment.

In the run-up to the crisis, securitisation was a key driver of the boom in mortgages, credit card loans and auto loans as it transformed these loans into securities that investors could easily buy, lowering their costs and increasing demand for them.

After being virtually wiped out during the turmoil, the market has shown some signs of life but not enough to lure back many investors.

Government programmes have propped up some parts but many of the initiatives are due to expire soon and the financing available at low interest rates remains limited as many investors have held back.

The stumbles of the securitisation market have also contributed to the decision by AIG, the insurer that was bailed out by the US government, to pull back from a number of sales of units such as its aircraft leasing arm.

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