In a widely anticipated move, Citigroup this morning announced it will exchange common stock for up to $27.5 billion in existing preferred and trust preferred securities held by private investors at a conversion price of $3.25 a share. The US Treasury will match the exchange at the same price but only up to a maximum of $25 billion of its preferred holdings.
Citigroup has been the largest recipient of direct capital injections from the US government over the past four months, beginning with an initial allocation of $25 billion in series H preferred stock under the first wave of Troubled Assets Relief Program (Tarp) funds issued on October 28 last year. It is these series H securities that will be converted into common stock.
Not included in the conversion are an additional $20 billion of Tarp series I preferred stock, issued on December 31, 2008 and a further $7 billion in Tarp series G preferred stock. Both of these holdings will be exchanged into separate trust preferred securities of greater structural seniority, which will pay a coupon of 8%.
Based on the maximum conversions involved, the US government would own approximately 36% of Citi's outstanding common stock, although based on preferred securities still held, the Treasury could have elected to have taken more than 70% of the firm had it wished. Existing common shareholders will now hold approximately 26% of the outstanding shares with all private preferred investors' new stakes to be determined following the exchange.
In announcing the plan Citigroup stressed that the conversion did not represent the US government taking an even larger holding in the firm, conscious of the growing public anger in the US that the $350 billion in Tarp funds injected directly into US bank holding companies and automakers appears to have done nothing to arrest the nation's slide into recession or to engender the resumption of consumer lending.
"This securities exchange has one goal - to increase our tangible common equity (TCE). While we believe Tier I capital remains the most important measure of the financial strength of banks, we recognise that the markets also view TCE as an important measure," said Citigroup chief executive Vikram Pandit. "This transaction - which requires no additional investment from US taxpayers - does not change Citi's strategy, operations or governance. Our clients and partners will not be affected and will continue to receive the high level of service they expect from Citi around the world."
The transaction could increase the company's TCE from the fourth-quarter level of $29.7 billion to as much as $81 billion. Citi's Tier I capital ratio was 11.9% as of December 31, 2008, which it claims is among the highest of any major US bank.
Citigroup will also be restructuring its board of directors as a third of existing members have confirmed their intent to step down at the firm's next annual meeting in April. Three directors have announced they will not seek re-election to the board while another two will reach retirement age by the time the meeting is held. Citi did not provide the names of the directors in question.
The equity conversion came the same day Citi announced it suffered a pre-tax goodwill impairment charge of approximately $9.6 billion in the fourth quarter of 2008 that had not been calculated at the time the firm announced its year-end results. The impairment was attributed to "the rapid deterioration in the financial markets, as well as in the global economic outlook generally," the company said in a statement. The loss brings Citigroup's year-end losses for 2008 to $27.7 billion.
In early trading in New York, Citigroup equity dropped sharply from the previous day's close of $2.46 to $1.77 a share at 10.45am local time.
See also: Bernanke: Public-private partnership required to value toxic assets
US Treasury doubles aid to Fannie Mae and Freddie Mac
Questions remain over $1trn toxic asset purchase plan
"$78 billion Tarp windfall" for banks