|Time to Expiration||7.5 years||7.5 years|
|Common Stock Price||$14||$4.56|
The following guest commentary was written by David Bunting and Brett Haire, the two principals of Brave Asset Management. Prior to starting BAM, they ran the Equity and Government Bond Trading departments at First Boston Corp. where they were responsible for warrant trading and corporate finance valuation. Almost 2 years ago, on July 14th, 2009, we published a guest commentary piece on TheStreet called "Treasury Should Auction Bank Warrants." We think the attention called to the TARP warrant situation then saved the U.S. Taxpayer some serious money and allowed John Q. Public a very interesting investment opportunity. Since then, over a dozen TARP warrants have been auctioned with generally benevolent results. However, the largest warrant auctions, (the A+B warrants for Citigroup> ( C - Get Report)), have not fared so well and in our opinion, represents an interesting opportunity. Sometimes gray hair and an appreciation for financial history pays dividends. We think this is one of those times. Think back to 1988. An unfriendly bank takeover of the Irving Trust Co. by the Bank of New York> ( BK - Get Report) had been consummated. To bridge a valuation gap, the consideration package included a 10 year non-callable warrant on BK. Turn the clock ahead 20 years, and change the dynamics a little: The bank being taken over is Citigroup, the rescuer is John Q. Public and part of the consideration package, is once again, a 10 year non-callable warrant. Mark Twain suggests that while history doesn't repeat itself, it does rhyme every once in awhile. Here are some interesting similarities between today's Citigroup warrant pricing and Bank of New York's 20 years ago: * After issuance, both warrants suffered significant price erosion and market disdain; * Ultimately, at its nadir, sometime in 1991, the Bank of New York warrants visited $1.00. Citigroup's B warrant at its recent low traded at 18 cents. * Close to expiration, in 1998, the BK warrants traded higher than $200.00 / warrant * From a valuation perspective, here are some relevant comparisons from when the BK warrants were trading at a buck:
In 1991, BK was not a ward of the country like Citigroup is today. However, benevolent economic and yield curve conditions, coupled with an exceptionally long life, propelled BK from almost single digit price levels to a split adjusted price of over $280.00.
This environment provided stupendous linear results for the warrants which moved them from $1.00 to well over $200.00. Can history repeat itself? The U.S. Treasury was fiercely determined to nurse Citigroup back to health and rescue the banking system so... isn't it reasonable to assume that Citigroup with 7.5 years to go, could catch a similar break and enjoy some tailwinds that could also provide the warrant holders with huge BK like returns? At the time of publication, the authors and their firm were long Citigroup stock and warrants.