Blackstone and the Sale of Citigroup’s Loan Portfolio

Q1. Yes, the loan portfolio was substantially undervalued in Blackstone’s view, especially because

of the mortgage crisis erupted in 2007. Also, Blackstone could further diversify its portfolio by

selling some of their positions and reinvesting the proceeds in other loans. For Citigroup, they had

suffered unprecedented losses and was facing the prospect of having even more considerable

losses if not selling these loans. Citigroup will earn from this transaction as Blackstone and TPG

shall shoulder the financial cost of LIBOR+100bps.

Q2. Calculating the discounted cashflow using binomial tree method (base on default and

survival), the discounted cashflow is $5.9 billion, considering the cost of $6.11 billion, the NPV

shall be negative $0.21 billion.

Blackstone paid $1.26 billion in year 0, considering returns in year 1 to 5, the IRR is calculated

28%.

Q3. A. Probability of default = CDS spread / (1-recovery rate), the implied default rate each year

is 23.6%. The implied IRR is 25.5%.

B. For the cashflow, the recovery rate shall be deemed to be 100% due to the purchase of CDS.

Since the loan is protected by CDS, the risk-free interest rate shall apply. Value of the investment

is $5.4 billion.

Q4. I believe CDS method applies better. This is due to the significant change in the credit market

situation in 2007, the historical data shall no longer apply to the evaluation. The CDS method can

truly reflect the current market condition at the time we make this transaction.