Citigroup, the fourth-largest U.S. bank by assets, has announced that it will close its global distressed-debt unit, which invests in troubled companies and assets, as part of its ongoing restructuring efforts.
A Memo from the Top Executives
According to a memo obtained by CNBC, the decision to wind down the global distressed-debt unit was made by Citigroup’s top executives, including CEO Jane Fraser, who took over the helm in February. The memo said that the unit, which had about 50 employees, was no longer aligned with the bank’s strategic priorities and profitability goals.
The memo also said that the bank will continue to support its existing distressed-debt clients and portfolios until they are fully exited or transferred to other parts of the bank. The memo did not specify how long the process would take or how much it would cost.
The global distressed-debt unit was part of Citigroup’s markets and securities services division, which reported a 30% drop in revenue in the third quarter, compared to a year ago. The unit was responsible for buying and selling debt and equity of companies that were in financial distress, such as bankruptcy, restructuring, or default.
A Move to Simplify and Streamline the Bank
The closure of the global distressed-debt unit is the latest in a series of moves by Citigroup to simplify and streamline its sprawling operations, which span more than 100 countries and dozens of business lines. In September, Fraser announced a major reorganization of the bank’s businesses, which included creating two new global units: consumer banking and institutional clients group.
Fraser also said that the bank would exit 13 consumer markets in Asia and Europe, where it had low market share and profitability. The bank also said that it would sell its Australian consumer business to National Australia Bank for $1.2 billion.
Fraser’s overhaul is aimed at improving Citigroup’s efficiency, returns, and risk management, as well as addressing the regulatory issues that have plagued the bank in recent years. In October, Citigroup agreed to pay a $400 million fine to the Federal Reserve and the Office of the Comptroller of the Currency for failing to fix its long-standing problems with data governance, internal controls, and risk management.
A Challenging Environment for Distressed-Debt Investing
The closure of the global distressed-debt unit also reflects the challenging environment for distressed-debt investing, which has been affected by the low interest rates, high liquidity, and government stimulus that have supported many struggling companies during the Covid-19 pandemic.
According to data from Refinitiv, the global volume of distressed-debt deals fell by 41% in the first nine months of 2023, compared to the same period in 2022. The average yield on U.S. distressed bonds, which are bonds that trade at a significant discount to their face value, also dropped to 8.6% in November, the lowest level since 2014.
Some of Citigroup’s rivals, such as Goldman Sachs and JPMorgan Chase, have also scaled back or exited their distressed-debt units in recent years, as they faced lower returns and higher competition from hedge funds and private equity firms. However, some analysts and investors believe that the distressed-debt market could see a revival in the near future, as the pandemic-induced recession and the rising inflation could trigger more defaults and restructurings among vulnerable companies.
