Is Race to Recapitalize a Sign of Panic?
Aside from the layoffs, BofA and Citi share other similarities. Just as Bank of America has been racing to recapitalize, Citigroup also is selling off assets to meet higher regulatory standards and to hoard cash. The $4.1 sale of EMI Group’s music and publishing businesses seem logical, considering they’re “noncore” operations.
However the planned sale of its consumer finance and credit card business shows Citi shares BofA’s need to divest operations even if they’re qualified and have the potential for growth. Rebranded as OneMain, the business has a book value of about $2 billion and roughly $13 billion of assets. Then there was the recent sale of home-loan servicing operations with a portfolio value of $2.6 billion.
We can quibble over whether the timing was right on EMI or whether the OneMain and loan servicing moves are necessary to move Citi away from risky debt. But the bottom line is this difficult credit markets has all but assured Citigroup isn’t going to get the best deal on these operations. Lenders are reluctant to finance big price tags, which sets a ceiling on even attractive assets.
In fact, the multibillion-dollar price tag on One Main has prompted Citi to offer financing through its own operations just to entice a buyer. What kind of transaction is that? If the businesses are indeed ugly and worth getting rid of, Citi has failed to significantly limit risks by fronting the money for a sale. What if another recession strikes, business craters and the buyer defaults? After all, that’s how Citi got stuck holding EMI in the first place.
It all makes you wonder just how desperate Citi is to unload operations and shore up its balance sheet…