Two TARPs for Citi (C)
We’ve all seen the news of Treasury pumping more money into Citigroup (C), but how do the details play out for shareholders or prospective shareholders?
The Treasury Dept issued a term sheet with some of the capital injection details. Stepping through them should give some insight into how good or bad a deal shareholders and taxpayers got.
One key element of the plan is government guarantees for $306 billion of C assets. Citi isn’t totally off the hook here. They absorb the first $29 billion of losses on these assets. Losses above that are shared 90/10between the gov’t and Citi. The TARP takes the next $5 billion in losses, the FDIC owns the next $10 billion. After that, the Federal Reserve covers the losses with a loan at 300 basis points over the Overnight Index Swap (OIS) rate. There appear to be several different types of OIS transactions and the terms sheet didn’t specify details, but I assume the base tracks the Fed Funds rate pretty closely. The government share of the loss is covered by non-recourse loans, meaning all the Fed can do is seize the assets. And those assets will be worthless if the situation deteriorates to where the Fed has to seize them.
In exchange for this guarantee, Citi is issuing $7 billion of preferred stock ($4 billion to Treasury, $3 billion to the Fed) at 8%. In addition, there’s a management oversight kicker, “[Treasury] 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.”
One restriction I didn’t see covered widely is dividends. Under this agreement, Citi cannot pay a dividend of over 0.01 per share per quarter for the next 3 years. Anyone buying the stock because a quote summary shows a 17% dividend yield is going to be very disappointed.
That covers the asset guarantee. Cost to Citi, $560 million per year in preferred dividends, they still own the first $29 billion of losses and 10% of everything above that. If losses on the guaranteed pool top $44 billion, Citi is covered, but only by loans from the Fed. And the common stock dividend is cut to the bone.
The other component of the rescue agreement is the government’s TARP preferred investment. This one is a little simpler. The gov’t is buying $20 billion of preferred with an 8% yield. Unlike the earlier TARP buys, the yield doesn’t step up after five years. The same dividend restriction is in place, but the government would look favorably on a request to hike it if Citi successfully raises more private capital.
Citi also needs to submit an executive compensation plan for Treasury approval. Sayonara big paychecks and bonuses.
Treasury also gets warrants for $2.7 billion worth of common stock at a strike price of $10.61.
Summarizing, Citi shareholders got a better deal than an FDIC takeover or the very dilutive bailouts FNM, FRE and AIG got. In those deals the government took warrants for 80% of the companies at strike prices of near zero. Citi also has to follow the FDIC’s mortgage modification procedures and we don’t know how much of this loan pool fits that model.
Citi got $20 billion in cash and a cap on loan losses at terms better than they could have gotten in the market. The statement doesn’t say, but it’s safe to assume the $306 billion assets pool is the really ugly stuff. We don’t know how much that may have already been written down or how much farther it has to go. Citi actually only gets covered for $13.5 billion of losses, the 90% government share of losses between $29 and $44 billion. If I read the term sheet correctly, the Fed guarantees losses above $44 billion, but those guarantees are loans to Citi, not outright coverage. Dividend payments to the government on the preferred will cost Citi $2.16 billion per year.
From a taxpayer perspective, the deal isn’t bad, but isn’t as good as it could have been. If Citi survives, the 8% coupon on the preferred is a pretty good return and the warrants give some upside if the stock price gets up into double digits. I think the 80% dilution in previous bailouts was excessive, but I would have liked to see a much lower strike price for our warrants in this deal.
The deal is punitive enough that I doubt we’ll see banks lining up saying “me too.”
One thing the government hasn’t done with this deal is provide any consistency. Bear, Stearns was allowed to fail, Fannie and Freddie were bailed with massive dilution through warrants, the Fed stepped in to save AIG under similar terms to FNM and FRE, Lehman was allowed to fail, TARP was originally supposed to buy bad assets, then it was a capital investment program, now we have a new template for the Citi intevention.
The key questions remaining are whether this will be enough and who’s next.
This plan takes a zero stock price off the table, but about the best that can be said for it from a shareholder perspective is it’s better than the alternative. The 8% payout on the preferred is a substantial expense for a company that isn’t making money.
I don’t have a position in Citi and don’t plan on buying or shorting it. The easy stocks are tough enough.