Yesterday, Citigroup Inc. (C) sold 5-year senior remarketednotes worth $1.875 billion. This corresponded to the final of the four series of debt securities Citi needed to remarket as per the terms of its Upper DECS Equity Units that were issued to the Abu Dhabi Investment Authority in December 2007.
Citigroup sold the 5-year senior remarketednotes worth $1.875 billion at a coupon rate of 3.953% that will mature on June 15, 2016, with spreads 200 basis points more than governments. The notes have been rated ‘A3’ by Moody’s Investors Service, the ratings arm of Moody’s Corp. (MCO), ‘A+’ by Fitch and ‘A’ by Standard & Poor’s.
The Abu Dhabi Investment Authority is required to buy a total of 235.6 million shares of the Citi common stock, under the terms of the Upper DECS Equity Units and exclusive of the impact of the 1-for-10 reverse stock split that became effective on May 6, 2011.
The purchase was slated in four equal installments on March 15, 2010, September 15, 2010, March 15, 2011 and September 15, 2011, at a price of $31.83 per share or $7.5 billion in aggregate. Proceeds from this fourth and final remarketing would be used to comply with the last stock purchase obligation on September 15, 2011.
The Impact
This is projected to increase Citi’s Tier 1 Common and Tangible Common Equity by $1.875 billion in the third quarter of 2011, while Tier 1 Capital will remain unaffected due to the required stock purchase.
Citi Remains Neutral
Citi’s capital strength and credit quality trends have improved in the recent quarters. Though restructuring initiatives are encouraging, the revenue headwind remains a concern. Shrinking of its business through assets sale, the CARD Act and the financial reform law will continue to challenge revenue.
Going forward, wethink that solid earnings at the company would remain elusive until its revenues experience a decent growth. However, its core business, Citicorp, remains attractive. International business is gaining momentum and should support its earnings.
Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the fundamentals, we are maintaining a long-term Neutral recommendation on the stock.
