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Citigroup's Other 'Financial Engineering' Project Still Moving AheadFinancing KKR Buying Loans To KKR

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Kohlberg Kravis Roberts and Citigroup are moving ahead with plans to create a KKR fund to buy LBO loans from Citigroup with more loans from Citigroup. Despite the emergence of the Entity, we still consider this the best story ever.
KKR is providing $2 billion of equity funding through its Strategic Capital Fund, according to Financial News. Citigroup will underwrite $8 billion in debt financing. KKR will then use the leveraged fund to purchase LBO loans from Citigroup—and, perhaps from other banks with LBO loans that are currently being sold under-par—which will allow Citigroup to move the loans off its books without flooding the broader market with the loans.
Citi and KKR have quite a cozy relationship. The bank is one of the private equity firm's largest lenders. It reportedly had underwritten some $50 billion of loans that it was not able to syndicate. There are indications, however, that it may have since sold some of those loans by offering them to investors at 95 to 97 cents on the dollar.
Perhaps the most mind boggling aspect of this deal is that the LBO loans KKR is reportedly interested in buying are the loans Citigroup made to finance KKR acquisitions, including the buyout of First Data. Follow this closely: Citigroup is lending money to a KKR vehicle that will buy up loans Citigroup made to KKR owned companies.
The idea seems to be that investors might be more interested in buying loans made to the new KKR entity than those made to the KKR portfolio companies. But since the major assets of the new KKR company will be loans to those portfolio companies, it appears that all the new investors are buying is whatever security they get they get from that extra $2 billion in equity and, perhaps, some diversification value.
Questions are being raised—apparently by regulators and others—about how tough of a customer the KKR fund will be when it comes to negotiating prices for the loans it buys from Citigroup. How tough can you be when your buying assets with leverage provided by the seller? In short, some fear that the fund may end up paying a premium to the market price for the loans, artificially pumping up Citigroup's balance sheet.
KKR changes tactics to get finance away [Financial News via DealBook]