George S. May Business Blog

Citigroup Repays More TARP Debt

Investors’ enthusiastic reception for Citigroup’s sale of $2 billion of trust preferred securities Wednesday takes the once-sputtering bank another step closer to repairing its balance sheet and repaying taxpayers the billions still owed. But it has many more steps ahead before it can say it is truly out of dark waters.

Trust preferred securities, or TRUPs, are long-term securities that are treated as capital rather than a liability on a bank’s balance sheet. Investors who buy receive regular interest payments, but the issuing bank can defer payments when necessary or redeem the TRUPs at face value before they mature.

The issue that was sold Wednesday via a trust, Citigroup Capital XII, is expected to offer bond buyers an 8.50% yield. This is lower than initially expected, an expected preliminary price guidance of 8.875% was expected as eager investors were bidding up the price of the securities.

Plans for this offering were announced as part of Citi’s exit from their TARP obligations last December, when it sold about $20.5 billion in securities to repay a part of the $45 billion government stake in the company. The government still owns 7.7 billion of Citi common shares, which represents a 27% stake worth about $31 billion. The U.S. also owns about $5 billion of the type of Citi trust preferred securities being sold in Wednesday’s offering.

Citi plans to use the new-issue proceeds to rebuild its capital, while keeping in line with a plan hammered out with regulators late last year. The sale will also expand the market for Citi preferreds, of which there are currently about $15.5 billion outstanding.

The sale is part of a plan by Citi to issue a total of just $15 billion in new long-term debt this year as it shrinks its balance sheet. In years past, Citi often sold $50 billion or more annually in long-term debt.

In a report, the research firm CreditSights said Citi is “back from the brink and back in business” but added that the bank “is still a work in progress.” It cited Citi’s improving liquidity and inexpensive stock price as reasons why investors would be eager to risk money on the bank even as it works to regain its footing. Citi’s shares climbed about 3.7% Wednesday to $3.96.

Citi’s deal prospectus filed with the Securities and Exchange Commission noted the securities are “rated below investment grade.” The TRUPs carry speculative-grade ratings: Ba1 at Moody’s Investors Service and BB- at Standard and Poor’s. Low ratings did not diminish demand, however, nor did the recent unpopularity of trust preferred securities.

“The notable thing about this specific deal is that the preferred market has been somewhat closed as there’s been a clear lack of liquidity,” said William Larkin, fixed-income portfolio manager at Cabot Money Management in Salem, Mass.

He said it had been too expensive for borrowers to issue this type of security, but now that the market is open he expects more are likely to follow. “If the Citi deal is successful, I’m sure other banks and utilities will get in the game,” he said.

Orders for Wednesday’s offering exceeded $5 billion. Interest from institutional investors was heavy, but retail buyers were also clamoring for a piece of the action. Asian private-wealth investors have expressed great interest, according to a person familiar with the deal.

Larkin noted that the price of these securities came at a “very reasonable rate” and was close to where comparable securities were trading just prior to the banking crisis.

“Most of these securities were trading just shy of 8.00%, and that’s only about 100 basis points less than where these were sold,” Larkin said. He added that at one point, the preferred market was considered toxic by investors. “A thirst for yield and demand for corporates has spilled from the high-yield area into the preferred market,” he said.

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