Citigroup Inc. (C) has finalized a deal on Monday with the U.S. government to repay the bailout money it had received from the government for its participation in the Troubled Asset Relief Program (TARP) at the height of the credit crisis last year. Citigroup has also reached an agreement with the U.S. Government and Regulators to terminate the loss-sharing agreement for its toxic assets.
Citigroup had received $45 billion in TARP funds last year. Later, around $25 billion of that was converted into common stock, representing nearly 34% of its stake held by taxpayers. Citigroup has the remaining $20 billion in TARP funds to repay.
According to the terms of the deal, Citigroup will immediately issue $20.5 billion of capital and debt for the repayment of the $20 billion of TARP Trust Preferred Securities. This includes a sale of $17 billion of common stock with an over-allotment option of $2.55 billion, $3.5 billion of tangible equity units that consists of about $2.8 billion of prepaid common stock purchase contracts and about $700 million of subordinated notes.
Concurrent with Citigroup’s offering, the U.S. Treasury will sell up to $5 billion of common stock it holds. The Treasury plans to sell the remaining stake in the next 6 to 12 months.
Citigroup also plans to pay $1.7 billion in bonuses in stock rather than cash. The company may also issue up to $3 billion of trust preferred securities in the first quarter of 2010 to strengthen its capital levels.
As part of the termination of its loss-sharing agreement with the government, Citigroup will cancel $1.8 billion of the $7.1 billion in trust preferred securities it had originally issued to the government for receiving that support. This would, however, increase Citigroup’s risk-weighted assets by approximately $144 billion.
Citigroup expects that the repayment of the TARP fund and the termination of the loss-sharing agreement will result in an after-tax loss of $6.4 billion. However, such actions will also result in a reduction of $1.7 billion in annual interest and around $0.5 billion in lower annual amortization expense.
While the repayment of the TARP fund through the common stock offering will free the company from government interventions and pay restrictions, this will lead to significant dilution of shares.
Bank of America Corp. (BAC) had already repaid the entire $45 billion of TARP funds following its $19.3 billion of equity offering last week. Wells Fargo & Co. (WFC) has also announced a $10.4 billion of common stock offering to repay the $25 billion TARP fund it received. In June, major banks including Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS) had already paid back their TARP funds.
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