On Tuesday, Citigroup Inc. (C) sold 4-part fixed and floating-rate notes worth $5.0 billion guaranteed by the Federal Deposit Insurance Corporation (FDIC) under the Temporary Liquidity Guarantee Program (TLGP).
The notes belonging to the first tranche worth $1.25 billion carry a coupon rate of 1.25% and will mature on Nov 15, 2011. The notes will pay coupons semi-annually with the first payment expected on May 15, 2010.
The notes belonging to the second tranche worth $250 million carry a coupon rate of 3 basis points (bps) below the 3-month London Inter-bank Offered Rate (LIBOR) and will also mature on Nov 15, 2011. The notes will pay coupons quarterly with the first payment expected on Feb 15, 2010.
The notes belonging to the third tranche worth $1.0 million carry a coupon rate equivalent to 3-month London Inter-bank Offered Rate (LIBOR) and will mature on Nov 15, 2012. The notes will pay coupons quarterly with the first payment expected on Feb 15, 2010.
The notes belonging to the fourth tranche worth $2.5 billion million carry a coupon rate of 1.875% and will also mature on Nov 15, 2012. The notes will pay coupons semi-annually with the first payment expected on May 15, 2010.
Citigroup was the sole book-running manager for the sale. All the notes are non-callable and have been assigned a ‘AAA’ rating by Standard & Poor’s Ratings Services (S&P), Fitch Ratings and Moody’s.
FDIC-backed debt is cheaper to issue than normal debt because investors are willing to accept a lower interest rate associated with lower risk coming from a government guarantee. Just 2 weeks ago, Citi had completed a sale of $5 billion government-backed debt offering.
Citigroup, once the largest U.S. bank by assets, fell behind last year after a series of acquisitions by rivals. The bank has been severely hurt by billions in losses and write-downs of problem loans and toxic assets.
The U.S. government injected $45 billion in bailout funds into the bank, $25 billion of which was recently converted to a 34% equity ownership stake. Top-level management at the company is conceiving plans to downsize the government’s stake in the company through a multibillion-dollar stock offering.
However, the latest offering does not seem to bode well for its efforts to exit from the government’s stake. The debt issues could now reinforce the perception that Citigroup still does not demonstrate adequate capital and liquidity and hence delay the sale of the government’s stake in the company.
Citi has issued $15.4 billion in non-guaranteed debt this year, compared to $54.6 billion in guaranteed debt issued since the FDIC program was initiated in the fourth quarter of 2008.
Citigroup will release its third quarter 2009 earnings on Oct 15, 2009 with a conference call scheduled later in the day to discuss its results. Ahead of its results, we maintain our Neutral recommendation on the stock.
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