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Following in Lehman’s footsteps? More questions than answers are raised by the news that Citi is shifting $12bn in leveraged loans to a group of private equity firms.

The proposal is ostensibly a scaled-up version of Citi’s October plan to shift $10bn of LBO debt in a joint venture with KKR. The twist then was that the LBO debt was almost all KKR’s in the first place.

This time around, however, KKR is not to be seen. Instead, the lineup involves Apollo, Blackstone and TPG, set to buy Citi’s loans at a 10 per cent discount. Apollo is understood to be taking 50 per cent of the portfolio.

Details, however, are thin on the ground.

It’s not really clear exactly how similar this latest deal is to the putative KKR scheme. Back in October the plan was for a seperate holding company to buy the $10bn of loans. A holding company in which KKR would provide the equity ($2bn) and Citi would supply leverage ($8bn).

Now, though, the suggestion is that the loans are to be sold outright, or at least, in three parcels.

A major impediment to that, however, lies in the sheer amount of paper we’re talking about. Sure, Apollo has large, established, distressed debt funds (some established in the last LBO slump of 1990-92) but $6bn would be quite a lot to swallow in one go. Ditto the remaining $6bn carved between TPG and Blackstone. Where, in short, would the financing to buy the debt come from?

Might the alternative, then be a joint venture between all four parties? A joint venture in which Citi might provide the leverage, as was proposed in October. Doing that would reduce Citi’s exposure, and have the added benefit of taking the sting out of having to accept 90 cents on the dollar. That, after all, adds up to a loss of $1.2bn.

Were that the case, then Citi wouldn’t be quite ridding itself of $12bn. It would still have a major stake in some kind of LBO holding company or CLO.

All of which is speculation, of course. The reports are that Citi will make details of the arrangement public at the same time as its Q1 results. Out next Thursday.

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