Although there's been considerable interest shown in CitiFinancial, the consumer financing arm currently being sold off by Citigroup Inc., both buyers and the seller are struggling to find ways to finance a deal.

Citi is trying to balance its own interest in taking CitiFinancial off its balance sheet at a price above the unit's $2 billion book value with getting funding cheap enough to make an equity investment in the unit attractive. It's unclear whether the big bank will be able to find the sweet spot anytime soon. "I'm hopeful, but I'm not optimistic," says one source close to the deal talks.

Of course, bidders have a vested interest in dampening down the enthusiasm to keep price expectations low, but it's also fair to say that financing a sale for CitiFinancial presents significant challenges to all parties involved.

Citi launched an auction for CitiFinancial in January. The unit, which will be renamed OneMain Financial this summer, makes personal installment loans, mortgages and home equity loans. Citi deemed such lending noncore and prepared to offload it by putting it in a "bad bank," Citi Holdings, in January 2009.

Several bidding groups have formed to vie for the unit. These include a group consisting of Blackstone Group LP, Carlyle Group, WL Ross & Co. LLC, Thomas H. Lee Partners LP and Brysam Global Partners. Another consortium includes Warburg Pincus, Kohlberg Kravis Roberts & Co., Banco Santander SA of Spain and asset manager BlackRock Inc. Other bidders, according to sources, include Apollo Management LP, J.C. Flowers & Co., Clayton, Dubilier & Rice LLC and Onex Corp.

Citi has indicated the auction isn't a fire sale (unlike American International Group Inc.'s sale of the American General Finance Inc. consumer finance unit to Fortress Investment Group LLC, completed last August for a paltry $150 million, representing a loss of about $1.9 billion), which means buyers need to find financing that's sufficiently inexpensive to allow enough money to come down the capital structure to make attractive a substantial equity investment. As one source close to the situation puts it, "The valuation of the equity is heavily dependant on the cost of the liabilities."

CitiFinancial is financed off its parent's balance sheet, and it carries about $11 billion in liabilities. Once that tie is broken, the lender would have to refinance the debt, which means creating a new capital structure. According to sources, any deal would likely include a large asset-backed securitization backed largely by personal installment loans, since the mortgage-backed security market is still effectively closed. Below that would come a tranche of secured bank debt, followed by unsecured high-yield bonds.

Although Citi has indicated it wants to be helpful in terms of the financing, the bank has not offered staple financing because it doesn't yet want to be boxed in by the market in terms of pricing.

Indeed, sources say Citi has been deliberately vague about details of the financing structures it's presenting to bidders. "There are still no answers to key questions, like rates or where they're going to place the debt," says a source. This is a deliberate attempt by Citi to allow for "price discovery" in a fluid market, and buyers at this point have no choice but to accept Citi's optimism that the deal can get done at attractive levels, says another source. Investors seeking yield may be willing to buy up the asset-backed securities and bank debt, while the high-yield market has been active enough to allow for some optimism that there are buyers of the notes.

However, bidders contend that it's likely the market will demand a risk premium for the debt, given that most of CitiFinancial's loans were made to low-income borrowers. If that premium is too high, equity investors' interest will cool, forcing Citi to step in, either to guarantee some of the debt or by lending at below-market rates. Either of those scenarios will mean that Citi may not be able to deconsolidate the unit from its balance sheet in the short term, defeating part of the purpose of selling the unit.

Of course, Citi has also demonstrated a willingness to hold on to parts of units in the short term. Take its deal with Morgan Stanley, which bought Citi's Smith Barney brokerage unit. That transaction began as a joint venture between the banks, then evolved into an outright sale. "The No. 1 goal is to deconsolidate," a source says, "but it might take multiple steps."

One source says Citi is hoping to wrap the auction up by mid-April but hasn't set a final deadline.