Citi Preferreds Exchange Terms (marketwatch)

Citi gives public preferred 5%-15% conversion haircut

By Marshall Eckblad
Last update: 7:52 a.m. EST March 3, 2009(This article was originally published Monday.)
NEW YORK (MarketWatch) -- Owners of publicly traded preferred stock in Citigroup Inc. will take a haircut of 5% to 15% when they exchange their shares into common stock of Citigroup at $3.25 per share.
The discount imposed on public preferred shareholders values the shares above the market price at which the preferred shares were trading before the deal was announced. Still, the pricing of the exchange, disclosed Monday, reveals that some preferred shareholders are more preferred than others in the deal.
Holders of the private preferred, who are getting a better price, include the U.S. and Singaporean governments, as well as Saudi Arabian Prince Alwaleed Bin Talal. Those investors will exchange preferred shares at par value, or the shares' original purchase price.
Citi had indicated Friday that, in contrast to owners of privately placed preferred stock, the public preferreds wouldn't get to exchange for Citi stock at their preferred shares' par value. Citi said only that the final price would be at a yet undisclosed "premium to market," and some investors anticipated facing a steeper discount to the shares' original purchase price.
Charles Lemonides, chief investment officer of ValueWorks LLC, a New York money manager, was worried Friday that Citigroup was going to shortchange retail investors, offering them inferior terms if they converted their preferred shares to common stock. But the details of the offering, which Citigroup disclosed in a regulatory filing Monday, turned out not to be so bad. The terms are "awfully close to fair and nothing to make hay over," Mr. Lemonides said.
A source who requested anonymity said the U.S. Treasury asked Citi to discount the value that public holders would receive in order to get the most out of its taxpayer-funded investment to bail out Citi.
A Citi spokesman couldn't promptly comment for this piece.
Shares in Citi were recently trading down 14% to $1.29. Citi preferred shares mostly fell Monday, reflecting the decline in the underlying common stock.
Citi will convert all the applicable preferred shares into common stock at $3.25 apiece. A person familiar with the matter said the price was calculated using a 20-day moving average price.
Citi said today in a filing with the Securities and Exchange Commission that holders of Series F, Series AA and Series E preferred stock - representing about $11.8 billion of the total - will be offered 95% of the liquidation value, while Series T holders - representing about $3.2 billion - will be offered 85%.
In treating its preferred shareholders differently, Citi, and even the U.S. Treasury, may be signaling that it will give better terms to private investors willing to take a large stake in recovering financial firms. At the same time, the relatively small haircuts may be an effort to show investors in preferred shares that they will not suffer dire consequences should the government purchase common stock in a firm.
Other reasons for treating the different shareholders differently may include ensuring the cooperation of the private holders, which would leave the government with a smaller stake.
The U.S. government struck a deal with Citigroup last week to convert a large portion of its preferred shares in Citi into common shares. The government will own about 36% of the New York bank.
On Friday, Citigroup said it would offer to exchange up to $52.5 billion of its existing preferred shares for common stock worth $3.25 each. In order to induce investors into exchanging preferred shares into common shares, the bank said it would suspend all dividends paid to common and preferred shares, with the exception of trust preferred securities.
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