How Citigroup found itself in talks to sell $12 billion of loans at a loss to Apollo Management, Blackstone Group and TPG as part of its drive to shrink the bank's balance sheet.

A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who declined to be identified because negotiations are private. The loans are part of the $43 billion in financing that Citigroup agreed to provide for leveraged buyouts last year before credit markets froze and saddled the New York-based company with hard- to-sell assets.

Citigroup plunged 19 percent in New York trading this year, partly on concern that writedowns of leveraged loans, which currently trade at about 90 cents on the dollar, might add to $24 billion of losses the bank has taken so far on mortgages and bonds that tumbled in value. Chief Executive Officer Vikram Pandit is shedding high-risk holdings to shore up capital.

``As a Citigroup investor you won't have to worry about more mark-to-market writedowns on these loans,'' said William B. Smith, senior portfolio manager at New York-based Smith Asset Management Inc., which oversees about $80 million, including about 66,000 Citigroup shares. ``There's now a consortium of private-equity firms saying what they're worth.''

Citigroup's so-called Tier 1 capital, the core measure of solvency demanded by regulators, was 7.1 percent as of Dec. 31, down from 8.6 percent a year earlier. A ``well-capitalized'' bank must have a ratio of Tier 1 capital to assets of at least 6 percent, according to rules set by industry regulators. Citigroup had about $2.2 trillion of assets at the end of 2007, more than any U.S. bank.

$200 Billion Logjam

Daniel Noonan, a Citigroup spokesman, declined to comment, as did Apollo spokesman Steven Anreder and Blackstone spokesman Peter Rose. TPG didn't return messages seeking comment.

The leveraged loan market seized up last year after losses on mortgage bonds prompted fixed-income investors to shun assets deemed risky. Leveraged loans are made to companies with credit ratings below investment grade, meaning they're considered by Moody's Investors Service and Standard & Poor's to carry a higher risk of default.

Citigroup is planning to complete the sale to Apollo, Blackstone and TPG as soon as next week, when the bank reports first-quarter results, the person briefed on the talks said.

The deal may help clear the $200 billion logjam of unsold loans, said Chris Taggert, an analyst at CreditSights Inc. in New York. Money managers who have raised funds to invest in distressed debt are striking deals with Citigroup and other banks now eager to unload them, he said.

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