Citi Sees Itself Securitizing Corporate Debt Worldwide

Citicorp plans to combine its global presence and securitization expertise to change the way companies all over the world manage debt.

Through a 140-person global securitization unit, the New York banking company says it can, with limited risk, aid businesses that were once shut out of financing or faced steep, almost prohibitive terms.

"We'll provide large blocks of funding for our customers without using our balance sheet," said Alvin G. Hageman, managing director in charge of the global securitization unit. "Issuers can raise money they otherwise would not get."

Citicorp's approach-securitizing other companies' assets and selling them to outside investors-is hardly new in the United States. But Citicorp, along with several other banks, is looking across international borders to help globalize what is now largely a domestic business, industry observers say.

"International securitization is a relatively new, but growing field," said Richard Gugliada, a managing director in the structured finance group at Standard & Poor's Corp.

The market for asset-backed securities-excluding mortgages and including collateralized loan obligations-will grow to over $600 billion this year from under $500 billion in 1997, according to figures from S&P and Moody's Investors Service. Deals typically start at $100 million and extend into a couple of billion dollars.

Citicorp expects to handle about $55 billion worth of deals this year, up modestly from $50 billion in 1997, Mr. Hageman said. But the unit's net revenue should rise 20% in 1998 because of an increased focus on overseas markets, where margins are wider, he said.

The global securitization effort fits in with Citicorp's plan to build on its existing overseas foundations. Indeed, chairman John Reed expanded on the company's intentions in the 1997 annual report, which was mailed to investors last week.

"We are using the insight gained as an embedded bank in emerging markets to help both multinational corporations and local companies achieve their goals," Mr. Reed wrote in his letter to shareholders.

The drive can also benefit Citicorp's own businesses and requires redeploying some staff that was working on domestic securitizations, Mr. Hageman said. "We're putting our efforts where we will get better returns."

Citicorp typically tries to structure deals that, to be cost-effective to the issuer, are at least 50 basis points cheaper than more conventional methods of longterm funding.

The banking company says it is uniquely positioned because of its overseas network and its ability to place deals publicly, privately, and through collateralized loan obligations. Also, Citi was one of the pioneers of the securitization business in the U.S. and can cull from that experience, Mr. Hageman said.

In one recent overseas deal Citicorp used securitization to help Lucent Technologies finance equipment sales to telephone companies in 145 countries. The banking company established a $1 billion special purpose trust to purchase receivables.

Citicorp is doing a lot of business with companies in Japan and Europe and increasingly looking at other markets, including those defined as "emerging." The less defined the countries' government and monetary policies, the more caution Citicorp exercises, Mr. Hageman said.

For instance, Citicorp has identified just four of Thailand's 15 banks as potential partners, Mr. Hageman said.

In many of the countries it takes lobbying on the part of Citicorp and other banks to change laws governing securitizations.

"The legal structure is the biggest obstacle many companies face," Mr. Gugliada said.

Citicorp follows the typical practice of requiring the issuer to hold the most volatile part of the security, the "first loss" piece. The other sections or tranches are placed with investors, like insurance companies, pension funds, and mutual funds.

The securitized deals typically bring underwriters like Citicorp 20 to 100 basis points, without direct risk. Problems could develop, however, if the underwriter, while acting as dealer, holds inventory on its books and the issue becomes troubled, said Mr. Gugliada of S&P.

To mitigate possible problems, Citicorp, before sanctioning a deal, looks very closely at the company that will act as issuer, said Myron S. Glucksman, vice president for new product initiatives in the global securitization group. "At times, even if there are investors for it we will try to stay away from it or structure it differently."

The company has not escaped unscathed from the business, Mr. Hageman acknowledged. "We've had times when there were problems."

One subprime auto deal ran into trouble last year and had to be liquidated-"a huge cost" to establish procedures for getting the most money back to investors, Mr. Hageman said. "You have to make sure the right structure is there to get the cash back."

Primarily, the banking company knows that its name is on the deal, and that blow-ups will tarnish its reputation. It focuses primarily on investment-grade companies and seeks overcollateralization to offset risks, Mr. Hageman said.

"If there is no revenue generated the investors don't get paid back, and that's the risk," said Henry J. Sandlass, a managing director with Citicorp Securities.

"I wouldn't want to have to explain to investors I sold a deal that didn't work," Mr. Hageman added.

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