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Consulting Blackstone on Acquiring Citigroup's Loans and Notes Portfolio

Executive Summary

In this project, I conducted a comprehensive analysis of Blackstone's potential acquisition of Citigroup's Loans and Notes Portfolio amidst the subprime mortgage crisis. Utilizing skills in discounted cash flow (DCF) analysis, qualitative assessment, and financial modeling, I evaluated the risks and potential returns of the investment. This led to a recommendation against the acquisition due to heightened credit risks, increased borrowing costs, and unfavorable economic conditions. Key skills showcased include financial analysis, risk assessment, and strategic decision-making.

Business Problem

Overview

In 2008, Blackstone considered acquiring a leveraged loan portfolio valued at $6.11 billion from Citigroup, priced at 83 cents on the dollar. The decision-making context was characterized by market volatility and economic uncertainty due to the subprime mortgage crisis. The primary objective was to assess the viability of this investment and its alignment with Blackstone's strategic goals.

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Problem Statement​

The core challenge was to determine whether the acquisition of Citigroup's loan portfolio would be a sound investment given the prevailing economic conditions and inherent risks. This involved analyzing market conditions, the portfolio's risk profile, and potential financial returns.

Methodologies

Quantitative Assessment

  1. Discounted Cash Flow (DCF) Analysis: Estimated the intrinsic value of leveraged loans and senior unsecured notes by discounting expected future cash flows.

  2. Financial Data Integration: Used LIBOR rates, CDS spreads, and historical default and recovery rates to inform the DCF model.

  3. Adjustment for Recession: Modified CAPM inputs and recovery rates to reflect increased market risks.
     

Qualitative Assessment

  1. Market and Economic Conditions: Evaluated the impact of rising CDS rates and the potential recession on asset values.

  2. Strategic Fit: Assessed the alignment with Blackstone's investment philosophy and risk management framework.

Skills

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  • Risk Assessment: Analysis of default probabilities, recovery rates, and CDS spreads.

  • Financial Analysis: DCF, NPV, and IRR calculations using Python and Excel.

  • Strategic Decision-Making: Evaluation of investment fit within Blackstone's portfolio.​

  • Financial Models: CAPM, DCF.

Results & Business Recommendation

Key Findings

  • Loan Portfolio: Positive NPV of $542.98 million and IRR of 22.37%.

  • Notes Portfolio: Negative NPV of $56.27 million and IRR of -4.37%.

  • Overall Portfolio: Combined NPV of $486.71 million and IRR of 12.93%.

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Business Impact

  • Increased Credit Risks: High CDS rates and default probabilities indicated elevated risk levels.

  • Higher Borrowing Costs: Rising LIBOR rates suggested increased financing costs.

  • Market Volatility: Economic uncertainties due to the subprime mortgage crisis heightened investment risks.

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Recommendation

Given the analysis, I advised against the investment due to the high-risk profile, potential negative returns during a recession, and increased borrowing costs. It was recommended to explore alternative, lower-risk investments that align with Blackstone's strategic objectives.

Next Steps

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  1. Continuous Market Monitoring: Regularly track market conditions and CDS rates to reassess investment opportunities.

  2. Explore Alternative Investments: Identify lower-risk assets that provide stable returns and align with Blackstone's strategic goals.

  3. Leverage Recycling Provision: If proceeding with the investment, maximize the strategic use of the recycling provision to dynamically manage and diversify the portfolio.

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