The Wall Street Journal-20080116-Credit Crunch- Citi Makes an Enticing Offer- Preferred Stock Will Pay 7- Return
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Credit Crunch: Citi Makes an Enticing Offer; Preferred Stock Will Pay 7% Return
During the announcements of huge losses and new efforts to raise capital, Citigroup Inc. Chief Executive Vikram Pandit quietly offered investors an interesting deal yesterday.
Lend the bank some money, he said, and we'll pay you a fat 7% return. The payouts will get the same favorable tax treatment as shareholders' dividends but will be more secure. And if Citigroup's fortunes recover, these lenders will get to share in the upside along with ordinary shareholders.
The offer comes in the form of $2 billion of so-called convertible preferred stock, which the bank said it plans to sell to the public. The prospectus hasn't been issued yet, but the terms should be similar to those offered to a handful of very rich investors in a just- concluded $12.5 billion private placement.
Those investors include the bank's former chairman, Sandy Weill, and Saudi Prince Alwaleed bin Talal. The stock will have a 7% yield. These are preferred stocks, which means they're a little like bonds. The dividends won't rise, but they are pretty secure, as they should get paid in full before common shareholders get a penny.
On the other hand, the dividends should get the same privileged tax treatment as payouts on shares. And investors will have the ability to swap their preferreds into ordinary shares if the price of the latter recovers 20% from its current depressed situation.
The securities will trade on the New York Stock Exchange like ordinary shares. Further details of the IPO will be coming in due course.
Meanwhile, investors already invested in the common stock may be wondering how much worse things are going to get. Citi shares fell another $2.12, or more than 7%, following the yesterday's earnings release.
At around $27, Citigroup stock has fallen more than 50% from the peak reached barely 12 months ago. The shares cannot fall as far as they have already, even if they were to go to zero. So in a technical sense, the worst is already past. The question remains whether that is also true in a meaningful way, and whether the stock may bottom out anytime soon.
One warning sign is that many investors are asking that question; the truly successful bottom-fishing is done solo, when others have given up.
A broader issue is the possibility of a massive, generational unwinding of financial leverage now underway. Investors who fear that's likely might want to avoid investing in any bank; in the worst- case scenarios, even the preferred stock would get slammed. But assuming that U.S. and international capitalism will somehow stagger on reasonably successfully, Citigroup's stock is starting to offer attractive risk/reward possibilities.
Citigroup slashed its dividend, but that leaves the payout looking pretty juicy. (On a $27 share, the yield is 4.7%.) Also, the bank is taking the necessary steps to shore up its balance sheet.
Even in that fourth quarter, Citigroup's global consumer revenues rose 13%, including a 28% rise overseas.
Transaction-service revenue was up 31%. Revenues from global wealth management, which includes both Smith Barney and the private bank, rose 28%. Total revenues for the quarter were $81.7 billion, even if the bank did earn a mere $3.6 billion in net income.
