Overview

In March 2008, Bennett J. Goodman, a Senior Managing Director at Blackstone, one of the world’s largest
private equity firms, was contemplating of purchasing a $6.11 billion of pool of leveraged loans from
Citigroup, one of the largest banking entities. Most of these loans were used to finance large leverage buy
outs (LBOs) that had been announced during early 2006 and late 2007. However, sub-prime crisis in late
2007 had led to considerable erosion in value of these portfolios and majority of these loans were trading
below par leading to re-pricing of a wide range of debt instruments. The reason for such re-pricing was
late realization of the fact that risks associated with these instruments were underestimated. However,
Goodman perceive that some of these instruments, pools of leverage loan portfolio were priced far below
their fundamental value and hence they were contemplating to buy one such portfolio from Citigroup.
Citigroup proposes to facilitate the transaction by providing debt financing for the purchase of the loan
pool. Blackstone would provide equity to finance the rest. As per the case, Blackstone is evaluating to
purchase a pool of leveraged loan from Citigroup with face value of $6.11 billion at price 83 cents for a
dollar. Citigroup offered to provide non-recourse debt financing for 75% at $3.81 billion and Blackstone
in partnership with TPG would contribute 25% at $1.26 billion equity. This note has made an attempt to
answer the following:

a. How the transaction make sense to Blackstone? Why Citigroup trying to sell the portfolio of
leverage loans?
b. What is the value of the deal for private equity firm using discounted cash flow basis? What is the
implied IRR?
c. Assess the purchase price using information on CDS Spreads
1. Using the historical recovery rates, what is the implied probability of default? What is the
implied IRR?
2. It is useful to note that buying the loan in combination with a CDS on the loan makes an
investor’ payoffs essentially riskless. What are the annual cash flows from such an
investment? How would you discount those cash flows? What is the value of such an
investment?
d. In which valuation approach do you have more confidence? Why?
e. Based on the calculations, how attractive is this deal to Blackstone?
Rationale for Blackstone behind buying our Citigroup’s pool of leveraged loan