Blackstone and The Sale of Citigroup s Loan Portfolio Essay

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HBS Project:
Blackstone and the Sale of Citigroup’s Loan Portfolio

Banaphol Ariyasantichai, Ryan Stankiewicz, James Freisinger, Brian James

Financial Markets and Institutions (F517)
Professor Xing Lu, Ph.D.
April 23, 2015

Blackstone and The Sale of Citigroup’s Loan Portfolio

In the second half of 2007, the banking industry and financial market showed signs of considerable stress by raising the default rate of mortgage and the decline in the value of residential mortgage-backed securities. This had led to a re-pricing of many debt instruments. By the end of 2007, Citigroup declared that the fair value of its U.S. sub-prime related direct exposure could decline by 20%. This affected Citigroup’s financial
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Taking the average of this total gives us a CDS Spread of 1431.77. This value is then divided by (1-.486) to determine the probability of default over 5 years which is 27.86%. The .486 was given as the most recent 5 year recovery rate for Senior Notes.

The IRR based on the new cash flows from the new default rates is 19.44%,which is higher than previous IRR results due to the default rate being lower.

4. In which valuation approach do you have more confidence? Why?

We have more confidence in the valuation that has a CDS on the loan since it will make our investment nearly riskless. We can better predict our future cash flows which allow us to paint a more accurate picture for valuations. Without the insurance, the potential outcomes can vary and cause our cash flows to be unstable and less predictable. We prefer having the known cash flows which still allow us to be profitable and have a positive IRR.

5. Based on your calculations, how attractive is this deal to Blackstone?

This deal seems to be very attractive regardless if the CDS is purchased or not. Blackstone also seems to have done their due diligence as it has done previous investments which had good track records of performance. Both valuations returned a positive IRR, which means the cash inflows will be high than the cash outflows for the time horizon of the investment. Without out the CDS, the IRR was 16.75% and with the CDS the IRR was 19.44%. The only