Zhitong Finance and Economics learned that Citigroup (CUS) has decided to exit its distressed debt trading business, one of the latest reductions by CEO Jane Fraser to reshape the company in pursuit of higher returns. The move, described by people familiar with the situation, would exit a key player in the distressed debt market and follow the bank's recent decision to exit municipal bond trading and underwriting.
Citigroup's closure of a distressed debt business run by Pat Chris and Joseph Begans will affect about 20 jobs, one of the people said. A company spokesman declined to comment.
It is worth mentioning that Bank of America and Goldman Sachs Group Inc. are other players in the market known for their bad business, and according to the people familiar with the matter, this area has shrunk to only a few large sell-side players in the world.
Citigroup has also experienced a number of senior departures in the business. Including two former co-principals – Olaf Orr** who left last year and Peter Hall who left earlier this year.
Earlier, Fraser announced in September that she was in the midst of the largest restructuring of Citigroup in decades to improve corporate efficiency and eliminate management hierarchies from the bank's 240,000 workforce. Fraser is determined to restore investor confidence in the company's ability to set and deliver on guidelines, which the company has repeatedly abandoned or failed to meet over the years.
It is understood that the non-performing debt trading business is a special trading activity in the financial market, which involves the purchase and **of those companies that have **substantially**, are at risk of financial distress or default.
This type of debt is often considered a high-risk investment because the company to which the debt belongs may be at risk of bankruptcy or restructuring. Distressed debt is characterized by its transactions** well below face value, typically less than 70 cents per dollar.
In addition, this type of business is usually volatile, i.e., it can be a loss after a year of good performance. Citigroup's business performed well in 2021 before slowing significantly in the following two years, according to two people familiar with the matter.
Zhitong Finance understands that investors in the non-performing debt trading business usually conduct in-depth research on the financial status, business model and market prospects of the company to which the debt belongs, as well as the relevant legal and creditor structure, to judge the potential value of the debt and the probability of recovery.
Such transactions are designed to profit from these discounted debts, especially if the company's financial position improves, the value of the debt rises, or a better return is obtained through restructuring.
However, distressed debt transactions also come with higher risks, including debt defaults, corporate insolvency, and low market liquidity. As a result, this type of trading is usually carried out by specialized traders and analysts who have the expertise and experience required to analyze these complex financial instruments.
About $260.4 billion of U.S. dollar-denominated corporate bonds and loans in the Americas were at a depressed level in the week ended Dec. 15, up 5% from a week ago, according to data compiled by Bloomberg.
In addition, banks need to invest more money when engaging in trading non-liquid corporate debt (i.e., debt that is not easily converted into cash quickly) as regulators set rules requiring banks to hold sufficient capital to withstand potential market shocks or financial crises to maintain their stability and solvency.
This means higher operating costs and lower possible earnings, as banks are unable to use this capital for other businesses that could generate higher returns. As a result, the new regulatory rules may increase the capital requirements for banks when trading such illiquid assets, which further increases the cost of engaging in such transactions.
For banks, this can lead to a re-evaluation of the profitability of these businesses, and sometimes even a decision to exit certain markets or types of transactions that are more capital-demanding and risky.
Citigroup is one of them. It is understood that the bank is the only large U.S. bank whose share price is below the level of five years ago, and its price-to-book ratio is ** to 05. Shows investor concern, indicating that shareholders believe the company is valued at about half of the accountant's valuation.
Now, as Fraser restructures the troubled bank, those decisions show Citi's willingness to forego certain franchises, even if they are competitive, in pursuit of a return boost consistent with its major U.S. peers. In addition to this, other initiatives have already included** retail banking outside the United States, as well as a major management restructuring accompanied by layoffs.