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Citigroup reports $110 million leveraged-loan loss as other banks avoid sector exposure

FILE PHOTO: The Citigroup Inc logo is seen at the SIBOS banking and financial conference in Toronto

By Saeed Azhar, Matt Tracy and Mehnaz Yasmin

NEW YORK (Reuters) -Citigroup took a $110 million writedown on leveraged loans in the third quarter, the company said on Friday as its Wall Street competitors downplayed their exposure to the sector.

"We took about $110 million in total between markdowns and losses on loans in the leverage space," Citigroup's chief financial officer Mark Mason told reporters after the company released its third quarter earnings.

U.S. banks wrote down $1 billion on leveraged and bridge loans in the second quarter as rising interest rates made it tougher for them to offload high-risk debt onto investors and other lenders.

This was highlighted by the sale in September of $8.55 billion in loans and bonds backing the leveraged buyout of business software company Citrix Systems Inc.

A group of banks led by Bank of America, Credit Suisse and Goldman Sachs took a collective $700 million loss on the deal, Reuters previously reported.

Shortly after, a group of banks - led by Bank of America and Barclays - canceled efforts to sell $3.9 billion of debt financing Apollo Global Management's purchase of Lumen Technologies' telecom and broadband assets, after failing to generate enough orders from investors.

Banks have since pulled back from leveraged financing in the wake of losses taken on Citrix and other deals, as investors lost their appetite for riskier, floating-rate leveraged loans amid rapid interest rate hikes and fears of recession.

JPMorgan for example, a major player in leveraged lending this year, largely remained on the sidelines.

"There are no real levels of loan write-down this quarter, and that market isn't yet to clear," Jamie Dimon, JPMorgan's chief executive officer, told analysts on a conference call. "Our share of it is very small. So we're very comfortable."

Morgan Stanley also scaled back its leveraged exposure in the third quarter.

"They actually were quite modest marks, given the environment," Sharon Yeshaya, Morgan Stanley's chief financial officer, told analysts.

The Wall Street giant is leading a group of banks to provide $12.5 billion in debt financing Tesla CEO Elon Musk's buyout of social media giant Twitter Inc .

Morgan Stanley CEO James Gorman said his bank has been "quite cautious in the leveraged finance arena." He later added, "Frankly, it's just not that troubling."

The turmoil in the leveraged finance market is also weighing on mergers and acquisitions, which slowed sharply in the third quarter.

"There’s no doubt that the cost of capital has gone up materially for debt financing of private equity transactions over the past 6-9 months," said Kevin Sterling, global co-Head of private credit at Goldman Sachs during an event this month. That means borrowers need more cash to operate in an environment with higher costs, he said.

(Reporting by Saeed Azhar, Mehnaz Yasmin and Matt Tracy; Editing by Lananh Nguyen and Josie Kao)