Citigroup to exit distressed debt business

Citigroup to exit distressed debt business
Wall Street firm is undertaking restructuring to revive investor confidence.
DEC 21, 2023

Citigroup Inc. has decided to exit the distressed-debt trading business, the latest retrenchment in Chief Executive Officer Jane Fraser’s effort to reshape the firm in pursuit of higher returns.

The move, described by people briefed on the matter, will remove one of the key players in distressed-debt markets, and follows a recent decision by the New York-based bank to get out of municipal bond trading and underwriting. 

Closing the distressed-debt business, run by Pat Kris and Joseph Beggans. will impact roughly 20 positions, one of the people said, asking not to be identified because this information isn’t public. A company spokesperson declined to comment. 

Fraser announced in September that she is undertaking the biggest restructuring of Citigroup in decades to make the company more efficient and eliminate layers of management within the bank’s 240,000-person workforce. The firm has repeatedly abandoned or missed targets over the years, and Fraser is determined to restore investor confidence in the company’s ability to set and meet guidance.

She was named CEO at Citi three years ago — a historic move making her the first woman atop one of the US banking giants. Since then, investors and analysts have kept close tabs to see how she goes about trying to revive the fortunes of the industry’s original behemoth. That’s a task her immediate predecessors left incomplete after the bank was left hobbled following the 2008 financial crisis and one where Fraser has little margin for error.

Distressed trading can be volatile, with outsized performance one year potentially followed by leaner times. The business at Citigroup outperformed in 2021 and slowed significantly in the two years after that, two of the people said. 

Bank of America Corp. and Goldman Sachs Group Inc. are among the other participants in the market known for their distressed franchises, a field that’s dwindled to only a few big sell-side players globally, the people said. 

Citigroup also has seen a number of senior exits from that business. That included the two former co-heads — Olaf Auerbach, who left last year, and Pete Hall, who departed earlier this year. 

Distressed-debt investors often hunt for troubled borrowers whose bonds or loans have fallen to below 70 cents on the dollar. Most credits require deep analysis, understanding both the financials and legal agreements that can determine who gets paid what in the event of a bankruptcy proceeding.

CITI CALCULUS

Traders and analysts specializing in distressed debt are a key resource for buy-side firms, often providing advice on when a discount is enough to warrant the risk. In a market selloff, so-called bargain hunters can profit from buying credit for cheap, as long as it doesn’t go further south.

About $260.4 billion of dollar-denominated corporate bonds and loans in the Americas traded at distressed levels in the week ended Dec. 15, a 5% increase from a week earlier, Bloomberg-compiled data shows.

Trading illiquid company borrowings is also a capital-intensive business under regulations aimed at ensuring banks can withstand unexpected hits. New rules are likely to impose a greater capital burden on such units.

Citigroup also carries the tag of being the only major US bank whose stock is trading below where it was five years ago. The collapse in the firm’s price-to-book ratio to 0.5 signals investor concern, showing shareholders value the company at about half of what its accountants say it’s worth. 

As Fraser’s restructuring of the embattled bank takes shape, the decisions show Citi’s willingness to part with certain franchises, even if they are competitive, in the pursuit of lifting returns in line with major US peers. Some of the other moves have already included offloading retail-banking units outside the US as well as embarking on a major restructuring of management accompanied by job cuts.

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