April 9 (Bloomberg) -- Citigroup Inc. is in talks to sell $12 billion of loans at a loss to Apollo Management LP, Blackstone Group LP and TPG Inc. as part of an effort to shrink the bank's balance sheet, a person briefed on the matter said.

A sale to the private equity firms would shield the bank from further declines in the value of the debt, said the person, who wouldn't 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 rose 35 cents, or 1.5 percent, to $24.11 at 9:46 a.m. in New York Stock Exchange composite trading.

$200 Billion Logjam

The company'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.

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. Analysts estimate the bank will report a loss of more than $4.7 billion, or 93 cents a share, according to a survey by Bloomberg.

Loan Prices

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.

``It would definitely raise loan prices given that large- scale buyers are stepping in,'' Taggert said.

Apollo, Blackstone and TPG stand to profit if demand for the loans pushes prices above Citigroup's discounted sale price. Apollo and Blackstone, which manages the world's biggest buyout fund, are based in New York. TPG, based in Fort Worth, Texas, led a group that agreed this week to buy a $7 billion stake in Washington Mutual Inc., the largest U.S. savings and loan firm.

Poised to Dispose

The most actively traded leveraged loans, which fetched 100 cents on the dollar as recently as last June, fell to a record low of 86.28 cents in February, according to data compiled by Standard & Poor's. Prices have since rebounded to 90.14 cents as banks reduced their backlog of unsold loans.

Citigroup's planned sale to private equity firms follows similar moves by banks to get leveraged loans off their books. Lehman Brothers Holdings Inc., Deutsche Bank AG and Credit Suisse Group sold loans to investment vehicles they created called collateralized loan obligations.

Pandit is poised to dispose of more than $200 billion of the company's assets, which increased by almost $700 billion from 2005 through 2007. Since he succeeded Charles O. ``Chuck'' Prince in December, Pandit has been whittling down Citigroup's inventory of leveraged loans and high-yield bonds while balking at financing pending deals. Under U.S. accounting rules, Citigroup must record losses when the market value of the buyout loans on its balance sheet falls.

Clear Channel

Two weeks ago, Citigroup led the sale of $1.45 billion of bonds that Apollo and TPG used to finance their $17.1 billion purchase of casino operator Harrah's Entertainment Inc. The bonds priced at 84 cents on the dollar.

Citigroup and five other banks were sued last month by private-equity firms Bain Capital LLC and Thomas H. Lee Partners LP for refusing to fund their $19.5 billion acquisition of Clear Channel Communications. The bank group countersued last week.

Citigroup also tried to back out of a bankruptcy-financing package for Solutia Inc., a St. Louis-based maker of nylon and plastics, because of changes in the credit markets. The case was settled in February.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: April 9, 2008 09:54 EDT