Citigroup Inc. has decided to exit distressed-debt trading as the next move of CEO Jane Fraser's ongoing restructuring, marking another closure in the firm's Wall Street operations.
As reported by sources familiar with the situation, the decision eliminates one of the key players from distressed debt markets, aligning with the firm's strategy to withdraw from low-return businesses. Around 20 positions will be impacted by this move.
Previously, in September, Fraser revealed a substantial restructuring plan for Citigroup in almost two decades. This comprehensive initiative involved reducing executives, streamlining operations and eliminating management layers within the bank's extensive 240,000-person workforce.
Internally labeled as Project Bora Bora, this restructuring aims to enhance efficiency. Fraser's goal with this overhaul is to address the firm's history of missed or abandoned targets, seeking to rebuild investor confidence by establishing and fulfilling company guidance.
Citigroup is the only major U.S. bank whose stock currently trades lower than its value five years ago. Its price-to-book ratio plummeting to 0.5 has led to investor apprehension, indicating that shareholders assess the company at nearly half of its stated value by accountants.
As part of its organizational restructuring plans, Citigroup initiated job cuts in November, affecting roughly 10 percent of its senior managerial positions, totaling about 300 managers.
Reasons behind the exit
The distressed debt group handles bonds and other securities from companies in or near bankruptcy. Investors in this field typically seek troubled borrowers whose bonds or loans have dropped below 70 cents on the dollar. This pursuit involves comprehensive analysis, covering financials and legal agreements to determine payment priorities in potential bankruptcy scenarios.
Professionals in distressed debt play a crucial role for buy-side firms, often offering guidance on when discounts justify the associated risks. During market downturns, these experts capitalize on purchasing credit at lower prices, aiming to profit without further declines.
According to Bloomberg data, $260.4 billion of dollar-denominated corporate bonds and loans in the Americas traded at distressed levels in the week ending December 15. This reflected a five percent increase compared to the previous week.
This type of trading is known for its volatility, where robust performance in one year can be followed by more challenging times. According to two sources, Citigroup's distressed debt business had a successful year in 2021 but notably decelerated in performance during the following two years.
Apart from Citigroup, Bank of America Corp. and Goldman Sachs Group Inc. are notable participants in the distressed market. This market has narrowed to only a handful of major sell-side players worldwide.
Another overhauling plan
Citigroup's decision to close its distressed debt division followed last week's announcement of the closure of Citigroup Inc. C's struggling municipal bond trading operations.
After a thorough review spanning several months, the New York-based bank plans to disband its municipal bond business by March 2024. This will impact approximately 100 employees, as per an internal bank memo.
After several successful years in the municipal bond sector, operational issues prompted the company to contemplate selling the unit.
"The economics of these activities are no longer viable, given our commitment to increase the firm's overall returns," said C executives Andy Morton and Peter Babej.
Increased capital requirements are anticipated to diminish the business's profitability. In addition, government initiatives at the state level have limited the bank's involvement in the municipal business until it adheres to local mandates. Citigroup was also excluded from several deals in Texas due to its firearms policies.
Upon closure, executives from each of C's five primary divisions will join the Executive Management team, directly reporting to Fraser, to heighten accountability and streamline decision-making.