Citigroup Reaps $100 Million Windfall From Massive AAA CLO Trade

(Bloomberg) -- Citigroup Inc. made more than $100 million trading a huge swath of the highest-rated collateralized loan obligations as market turmoil prompted asset managers in need of liquidity to unload securities at steep discounts.

Citigroup bought roughly $2 billion of AAA rated CLO bonds in late March at around 90 cents on the dollar from PGIM, the investment management business of Prudential Financial Inc., according to people with knowledge of the matter. The bank was later able to sell them closer to par as prices recovered, said the people, asking not to be identified discussing a private matter.

Representatives for Citigroup and PGIM declined to comment.

Savvy Wall Street traders are already on the hunt for bargains as the coronavirus pandemic fuels significant price dislocations across credit markets. Eldridge Industries’ Todd Boehly has been scooping up higher-rated CLO debt that others were forced to sell, while investors including Highbridge Capital Management and Varde Partners are preparing funds to capitalize on turbulent markets.

Read more: Ex-Guggenheim executive Boehly swoops in for record CLO yields

Citigroup’s deal helped provide liquidity for PGIM, the people familiar with the trade said. AAA bonds have been used by other sellers to boost capital in recent weeks, pushing spreads to extremes not seen since the financial crisis. Prices on the bonds, which pool leveraged loans, tumbled and spreads almost doubled to 500 basis points in one day alone. Buyers later resurfaced to purchase the beaten-down debt as spreads snapped back following measures by the Federal Reserve to keep credit flowing in the U.S. economy.

Citigroup’s trade also comes as the market widely expects banks to use eligible AAA rated CLOs as collateral via another resource designed to prevent a credit freeze -- the Primary Dealer Credit Facility.

The PDCF emergency lending program offers overnight and term funding to primary dealers, in exchange for eligible collateral, which also includes commercial mortgage-backed securities and collateralized debt obligations with the same top rating.

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