Citi to Rescue SIVs

It will create a credit facility to backstop its seven structured investment vehicles.
Author:
Publish date:

Updated from Dec. 13

Citigroup

(C) - Get Report

plans to bail out its beleaguered structured investment vehicles -- a move that would put added strain on the company's already stressed balance sheet.

The largest U.S. bank will create a credit facility that would provide a backstop to some $58 billion in commercial paper and medium-term notes that make up its seven SIVs. The action effectively brings onto balance billions of debt whose assets have been severely pinched due to concerns over subprime credit.

Specifics on the planned Citi backstop facility were unavailable late Thursday, but the anticipated plan is that the bank will form the facility at the beginning of next year.

Citi's stock was down 2.3% to $30.30 in premarket trading Friday.

Bringing the bank's seven SIVs, known as Beta, Dorada, Sedna, Vetra, Zela, Centauri and Five, on its balance sheet is a stark reversal for Citi, which has for several weeks stated that it would not be forced to bail out its investment vehicles, even after

HSBC

(HBC)

and Dusseldorf, Germany-based bank

WestLB

decided to bring their own SIVs onto the balance sheet to stave off price erosion.

Citi's rescue comes just days after Vikram Pandit was named the bank's CEO and Win Bischoff was named chairman in the wake of the ouster of former CEO Charles Prince.

The planned bailout also comes nearly a week after Standard and Poor's threatened to cut the ratings of SIVs sponsored by Citi,

Societe Generale

and WestLB.

A Citi spokeswoman declined to comment beyond the company's press release.

Two weeks ago, Moody's Investors Service also downgraded or placed on review some 20 SIVs, reducing its estimate of current net asset value of all SIVs by 10% to 15%. The rating agency also said earlier this week that it would take more time to further review other SIVs and could make additional moves as early as next week.

SIVs are entities set up by banks and investment firms that generate returns by issuing low-yielding short-term debt instruments and purchasing longer-term paper in student loans, credit cards and mortgage debt. Growing skittishness in the credit market, tied to the collapse of the subprime mortgage market, has had ripple effects in securities that hold bad mortgage paper, including esoteric collateralized debt obligations, or CDOs, and SIVs. As a result, SIV managers face the sticky problem of being forced to sell assets at fire sale prices.

Citi's move may prevent forced sales of assets, but places added pressure on its balance sheet. CIBC analyst Meredith Whitney has repeatedly questioned Citi's capital ratios, noting that it may have a shortfall of about $30 billion. She also has said a $7.5 billion cash infusion from the Abu Dhabi Investment Authority would not be sufficient to address the banks Tier 1 capital ratios -- a measure of a bank's financial health.

Well-capitalized banks typically have a Tier 1 ratio of about 6% of risk-adjusted assets. As of Sept. 30, Citi's Tier 1 ratio is 7.3%.

Tier 1 ratios may increase by 16 basis points as a result of Citi's latest moves, according to observers, which may put further pressure on the bank to scale back businesses, cut its workforce and offload ancillary assets.

The big bank is already on questionable financial footing after Prince left it with a tally of bad bank debt in leveraged loans and mortgage paper that could be nearly $14 billion.

Earlier Thursday, 16-year Citi veteran Chief Operating Officer Robert Druskin

retired, becoming the first high-level executive to depart in the fledgling Pandit era. Citi CFO Gary Crittenden is expected to take on added responsibility.