As part of its effort to unwind its holdings in Citigroup Inc. (C), the U.S. Treasury has announced its plan to commence selling $2.2 billion in trust preferred securities (TRUPS) it received from Citi in relation to the Asset Guarantee Program (AGP). The Treasury has made it clear that it will sell the TRUPS at a price which is not less than its par value plus any accumulated and unpaid distributions.
The Treasury had received these TRUPS in January 2009 as part of its effort to rescue Citi from the clutches of the recession. The TRUPS were part of the Treasury’s agreement to share Citi’s potential losses on $301 billion of Citi’s assets. This loss sharing agreement, which was intended as a sort of insurance, also included the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve. Citi handed over these securities as a premium for sharing any potential loss in the next 5 to 10 years.
As the Treasury neither had to nor has any further obligations to pay under the arrangement, the proceeds that it would receive following the sale will represent a net gain for the taxpayer fund.
BofA Merrill Lynch of Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), UBS Investment Bank of UBS AG (UBS) and Wells Fargo Securities of Wells Fargo & Co. (WFC) will act as joint lead managers for the offering. Citigroup Global Markets Inc. will act as global coordinator but not as an underwriter or sales agent.
Citi, one of the companies severely hurt during the credit crisis, had received $45 billion in bailout funds in 2008 through the Troubled Asset Relief Program (TARP). Later, around $25 billion of that was converted into common stock. Citi repaid the remaining $20 billion and terminated the loss-sharing agreement in December 2009. The Treasury has sold 2.6 billion of the 7.7 billion common shares it owned in Citi by July 2010.
However, the offering excludes the $800 million in TRUPS which have been retained by the FDIC but has to be turned over to the Treasury. It also excludes Citi’s warrants issued as part of participation in AGP and other Treasury programs.
We expect some sort of volatility in Citi stock price in the near-term following the TRUPS sale. However, the government overhang on the stock seems to reduce; this coupled with the company’s restructuring initiatives is encouraging. Its core business, Citicorp, remains attractive, while its international business also has a good growth momentum. An economic rebound would help it to witness a further improvement in credit quality.
Nevertheless, the recent legislative measures coupled with the shrinking of its Citi Holding business through assets sale would pose some sort of revenue challenge in the days ahead.
Citi is currently rated as Zacks #3 Rank (Hold), implying no clear directional pressure on the stock over the next one to three months. The stock is also rated Neutral in the long term.