NEW YORK (
plans to sell common stock in order to raise funds to pay off its bailout tab appear to be gaining steam. So the question now becomes just how dilutive is this equity raise likely to be?
were ticking marginally higher in late morning action following multiple reports late Wednesday that the company was getting ready to launch a capital raise, perhaps by the end of the week and possibly to the tune of as much as $20 billion, in order to repay its outstanding bailout funds. The stock was most recently up 0.6% to $3.88.
The latest reports, however, note that Citigroup's negotiations with the U.S. government to repay the funds may not come until after the holidays. The company was apparently pressuring regulators to get a deal done by next week, especially since
Bank of America
completed its repayment of $45 billion in bailout funds on Wednesday, but that timetable is very tight. Bank of America last week was able to raise more than $19 billion through an equity offering in order to repurchase the preferred shares.
A Citigroup spokesman declined to comment to
late Wednesday regarding a capital raise. The spokesman also declined to comment on Thursday, in response to a request for information regarding any such timing of an equity raise.
The Treasury Department owns 33% of Citigroup's common equity through a conversion of $25 billion worth of preferred stock earlier this year. That stake, originally part of the company's TARP funding, is now the government's to sell. What's left for Citigroup to repay is about $27 billion worth of trust preferred securities ($7 billion of which is associated with the asset guarantee program Citigroup agreed to last year) and roughly $465 million in warrants associated with its investment, according to David Trone, an analyst at Macquarie Capital.
Analysts covering the company say it's looking increasingly likely that Citigroup will have to raise additional capital in order to pay back the trust preferred securities, despite having sufficient cash resources.
Citigroup has "ample cash to repay $20 billion immediately, of course; the issue is regulatory capital required as
the government withdraws," considering that Citi's asset pool remains more problematic than other banks, Guy Moszkowski, an analyst with Bank of America Merrill Lynch, writes in a research note.
"Exiting TARP this late in the year would have little impact on 2009
compensation pool, we think, but could help avoid franchise erosion as competitors harp on TARP in deal pitches," Moszkowski writes. "We believe management views this competitive issue with some urgency, the heat having been turned up recently because of other transactions."
Moszkowski believes a $20 billion equity deal would be 7% dilutive to 2011 earnings, but 23% accretive to next year's earnings.
The accretion is from "low expected earnings in
2010 and since the gain from avoiding TruP
Trust Preferred coupon payments would swamp the EPS give-up," he writes. "As earnings improve in
2011 the dilution would kick in.
Of course at this point it's all speculation until further details are known about the equity raise.
"The initial $20 billion figure may well reflect the price to exit both TARP and FDIC TruPs and loss-sharing plan all at once, and so the capital raise to exit only the TARP TruPs may be much less," Moszkowski writes.
Matt O'Connor, an analyst at Deutsche Bank, points out other reasons why the capital raise will be positive -- once Citigroup repays the TARP funds it will no longer have to pay dividends on them. Over the near term at least, the lack of dividend payments will be more meaningful than an increase in shares, he writes.
Longer term, O'Connor estimates that the dilution to earnings would range between 5% and 15% on "normalized earnings of 65 cents."
Still another analyst, Vivek Juneja of JPMorgan Chase, believes that Citigroup's repayment of the trust preferred securities would likely be concurrent with the government selling its ownership of 7.6 billion in common shares, which would fully remove the government's ownership in Citigroup.
If Citigroup were to raise $10 billion, Juneja estimates the new issue of shares would result in a 6% dilution to normalized earnings, which he doesn't expect the company to return to before 2012. Dilution of Citigroup's book value and tangible book value would be about 8% and 7%, respectively, he writes. If Citigroup had to raise $20 billion in new equity, the earnings dilution would be around 15%.
Citigroup's Tier-1 common ratio would rise to 9.5% from 9.1% as of Sept. 30, while its Tier-1 capital ratio would fall to 11.7% from 12.8%, which are still strong levels. However, pro forma Tier-1 leverage would fall to 6.3% from 6.9%, which would be the lowest among the large banks, Juneja writes.
--Written by Laurie Kulikowski in New York.