Massive Citigroup, Inc. Bailout

Citigroup Inc. will be receiving more funds from the U.S government and guarantees on certain losses.  The bank made an agreement with the U.S. Treasury, the Federal Reserve Board, and the Federal Deposit Insurance Corp. (FDIC) on a series of steps to strengthen Citigroup capital ratios, reduce risk, and increase liquidity.

A press release by the FDIC stated:

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth.  In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital.

As part of the plan, the U.S. Treasury will invest $20 billion in Citigroup preferred stock under the Troubled Asset Relief Program (TARP).  Citigroup will issue an incremental $7 billion in preferred stock to the U.S. Treasury and the FDIC as payment for a government guarantee on $306 billion of securities, loans, and commitments backed by residential and commercial real estate and other assets.

The result for Citigroup of the asset guarantee is a new risk weighting of 20% on the $306 billion portfolio which will free up an additional $16 billion of capital to the company.  Citigroup will issue warrants to the U.S. Treasury and the FDIC for approximately 254 million shares of the company’s common stock at a strike price of $10.61.

Citigroup Inc. also has agreed not to pay a quarterly common stock dividend exceeding $0.01 (one cent) per share for three years effective on the next quarterly common stock dividend payment.

Per an announcement by Citigroup Inc. on this new round of government funding, Citi’s Tier 1 capital ratio for the third quarter ended September 30, 2008, on a pro forma basis, for the October TARP capital injection and the new capital generated by today’s announcement, subject to Federal Reserve Board approval, is expected to be approximately 14.8% and its TCE/RWMA ratio would be approximately 9.3%.

Now that Citigroup has cut the dividend it makes us ponder the dividend declaration made on Oct. 20 of this year.   On that day Citigroup declared a quarterly dividend on the company’s common stock of 16 cents per share, payable on November 26, 2008, to stockholders of record on November 3, 2008.   That’s a talented management staff at that bank.

Here is the release directly from the FDIC.
Summary of Terms.

Eligible Assets:
Asset pool consisting of loans and securities backed by residential real
estate and commercial real estate, and their associated hedges, as agreed, and other such assets as the U.S. Government (USG) has agreed to guarantee. Each specific asset must be identified on signing of guarantee agreement. Assets will remain on the books of institution but will be appropriately “ring-fenced.”

Size:
Up to $306 bn in assets to be guaranteed (based on valuation agreed upon between institution and USG).

Term of Guarantee:
FDIC standard loss-sharing protocol: Guarantee is in place for 10 years for residential assets, 5 years for non-residential assets.

Deductible:
Institution absorbs all losses in portfolio up to $29 bn (in addition to existing reserves) Any losses in portfolio in excess of that amount are shared USG (90%) and institution (10%). USG share will be allocated as follows: UST (via TARP) second loss up to $5 bn; FDIC takes the third loss up to $10 bn;

Financing:
Federal Reserve funds remaining pool of assets with a non-recourse loan, subject to the institution’s 10% loss sharing, at a floating rate of OIS plus 300bp. Interest payments are with recourse to the institution.

Fee for Guarantee -
Preferred Stock:
Institution will issue $7 bn of preferred stock with an 8% dividend rate (under terms described below). $4 bn of preferred will be issued to UST. $3 bn will be issued to the FDIC.

Management of Assets:
USG will provide institution with a template to manage guaranteed assets
This template will include the use of mortgage modification procedures adopted by the FDIC, unless otherwise agreed.

Risk Weighting:
Institution will retain the income stream from the guaranteed assets. Risk weighting for assets will be 20%.

Dividends:
Institution is prohibited from paying common stock dividends, in excess of $.01 per share per quarter, for 3 years without UST/FDIC/FRB consent.  A factor taken into account for consideration of the USG’s consent is the ability to complete a common stock offering of appropriate size.

Executive Compensation:
An executive compensation plan, including bonuses, that rewards longterm performance and profitability, with appropriate limitations, must be submitted to, and approved by, the USG

Corporate Governance:
Other matters as specified

This entry was posted on Monday, November 24th, 2008 at 8:51 am and is filed under Money Rates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.