Citi AA Pref Stock C AA PREF
February 27, 2009 - 11:21am EST by
nha855
2009 2010
Price: 8.88 EPS nmf nmf
Shares Out. (in M): 149 P/E nmf nmf
Market Cap (in M): 1,320 P/FCF nmf nmf
Net Debt (in M): 0 EBIT 0 0
TEV: 0 TEV/EBIT nmf nmf

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Description

 

I'm recommending a relatively simple arbitrage trade between the Citi AA Preferred stock and the Citi common stock. The absolute rate of return based on today's announcement is approximately 50%. You will be given the option to convert your pref stock to common based on a common price of $3.25 and valuing the prefs at face. In the downside event that Citi goes bust, you will be net short and your short is junior in the capital structure to your long, so you should make good money. Here's the arb in absolute returns:

Number of Shares of C Series AA Prefs Purchased           1.00
Purchase Price per Share               8.88
          ----------
Total Purchase Cost                 8.88
           
Face Value per Share             25.00
Conversion Price                 3.25
Number of Shares Converted per Pref             7.69
Number of Prefs                 1.00
Total Common Shares Received             7.69
Ending Stock Price                 1.72
Value of Shares               13.23
           
% Return         49%

 

 

I don't have much more to add here and apologize for the brevity, but I wanted to get this posted ASAP because I don't know how long this will last. Questions are welcome.

Catalyst

Deal Closes

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    Description

     

    I'm recommending a relatively simple arbitrage trade between the Citi AA Preferred stock and the Citi common stock. The absolute rate of return based on today's announcement is approximately 50%. You will be given the option to convert your pref stock to common based on a common price of $3.25 and valuing the prefs at face. In the downside event that Citi goes bust, you will be net short and your short is junior in the capital structure to your long, so you should make good money. Here's the arb in absolute returns:

    Number of Shares of C Series AA Prefs Purchased           1.00
    Purchase Price per Share               8.88
              ----------
    Total Purchase Cost                 8.88
               
    Face Value per Share             25.00
    Conversion Price                 3.25
    Number of Shares Converted per Pref             7.69
    Number of Prefs                 1.00
    Total Common Shares Received             7.69
    Ending Stock Price                 1.72
    Value of Shares               13.23
               
    % Return         49%

     

     

    I don't have much more to add here and apologize for the brevity, but I wanted to get this posted ASAP because I don't know how long this will last. Questions are welcome.

    Catalyst

    Deal Closes

    Messages


    SubjectArb
    Entry02/27/2009 12:23 PM
    Memberangus309

    Are you advising a short of the common here...I must be missing something


    SubjectSymbol
    Entry02/27/2009 12:28 PM
    Memberangus309

    What is the symbol you are using for this security?


    SubjectRE: Arb
    Entry02/27/2009 12:32 PM
    Membernha855

    Yes - you short about 7.7 shares of common for each share of preferred that you're long. That locks in the arb and you have 2 other ways that this can play out aside from conversion:

    1) The pref exchange fails and the company goes bust or close to it, in which case you are net short and your long is senior in the cap structure to your short. I would expect you to generate similar or slightly higher returns in this scenario (i.e. you could make 13.23mm on your short going to zero and if you lose 95% on your long, that will lose you 8.43mm for a net gain of 4.79mm on 8.88mm invested or +54%).

    2) The prefs rally strongly while the common does little or goes down in the meantime as the chances of a successful conversion dwindle. This is possible due to the FDIC announcement today. Your gains in this scenario whereby you just unwind the trade rather than convert could be enormous.

    My base case is that you end up converting and you are then long and short an equal number of citi shares, which jsut collapse. In this case you make +49%.

    Sorry I didn't explain this better at the outset but I was trying to trade and write this up at the same time and thought it was very timely.

     


    SubjectRE: Symbol
    Entry02/27/2009 12:33 PM
    Membernha855

    On bloomberg you would type C AA Pref <Go>. The CUSIP is  172967572. The stock is liquid (24mm shares traded today).


    SubjectSeries F
    Entry02/27/2009 01:28 PM
    Memberhawkeye901

    Spread also exists in the Series F.  I don't see how they can convert the public prefs at anything materially below par given how they are treating the privates.  I know the govt is rewriting the rules, but how can the private shareholders get materially better terms than the publics?  If the publics convert anywhere near par, this is a homerun...


    SubjectRE: Be careful
    Entry02/27/2009 03:15 PM
    Membernha855

    It's not clear to me how the company can possibly treat pari passu shareholders of listed securities differently from thier unlisted peers like Al-Walleed, Capital, etc. My full expectation is that the company treats all shareholders equally.


    SubjectRE: RE: Be careful
    Entry02/27/2009 04:36 PM
    Memberperspicar744

    Seems Citi does in fact aim for DIFFERENT treatment of public and private prefs:

    Buried in footnote 2 from the presentation, but not in the press release, "Ownership assumes conversion of publicly issued preferred stock is done at a significant premium to market, while the U.S. Government's and privately placed preferred are done at par."

    http://www.citigroup.com/citi/fin/data/p090227a.pdf?ieNocache=645


    SubjectRE: RE: RE: Be careful
    Entry02/27/2009 05:49 PM
    Memberjet551

    It certainly looks correct that Citi these will not be convertible at par but at a "premium to market" whatever that means...

    Here is the press release: http://www.citigroup.com/citi/press/2009/090227a.htm

    If you click on the link in the press release called "See attached transaction summary" and scroll down you will see the terms of the AA series.


    Subjectyou dont get par
    Entry02/27/2009 11:11 PM
    Membercompass868

    they give u total converted common shares out of ~21b assuming full conversion.   and they tell u conversion on every class is at 3.25 of common.  therefore u can back into what they think the public 14.9 gets done at (because to the earlier post u know privates and and govt done at par).  the math implies the public preferreds convert at 87.5% of par starting with 5.450 common shares.  that level aligns all the pro forma ownership %'s they give you.  was a great trade in the morning, obviosuly since then common collapsed and preferred rallied but still interesting.

    any risk they change the amend the 3.25? seems unlikely

     


    SubjectRE: you dont get par
    Entry02/28/2009 07:23 PM
    Membersparky371

    Compass,

    Agreed you don't get par. Co slide says "Final pricing to be determined upon conclusion of transaction." Using your clever method, I get different numbers, however. Maybe I made a mistake. From Citi slide: http://www.citigroup.com/citi/fin/data/p090227a.pdf?ieNocache=374

    Assuming all convert, total common shares = 21B approx.

    Current common = 5.5B

    Govt stock converts to 7.7B  (25/3.25)

    Priv and Public = 38% of 21B, or 7.98B.  Private is 12.5 B shr Pfd; ergo 3.85B common. Lvs 4.13B for Public Pfds.

    14.9B public pfds/X shrs per pfd = 4.13B common; ergo, X = 3.6, or 47% of par.  3.6X $1.50 C common closing price gives a value of $5.40 for the $25 par value preferreds, like the P's I traded. They closed at $8.05.

    The PR says Public to be "converted at significant premium to market". Based on Thursday's $2.50 close for C common, 3.6 shares is $9, which would qualify as "a significant premium to market" to the Thursday $5.50 close for the Pfd. I suspect that is what's going on.

    But, since "Final pricing" will be determined later, I suppose anything can happen. It's Calvinball in the capital markets nowadays.


    SubjectRE: RE: you dont get par
    Entry02/28/2009 07:35 PM
    Membersparky371

    Compass,

    Just realized my mistake. Should have been 4.13/4.58, or nearly 90% of value. Given the rounding in C's slides, we are in agreement.


    SubjectCiti is now like a bank demutualization
    Entry03/01/2009 01:43 PM
    Memberdawkins920

    I think that this idea is a great one.  The only thing I would add is how little risk there now is in Citi stock at $1.50.  

    Eseentially, Citi has become the world's largest ever bank demutualization.  Right now it is 21 billion shares and an 81 billion TCE, but the government has already said that if a large cap bank fails the stess test that it will get more equity at a 10 percent discount to the 20 day moving average of Feb 9.  For Citi this is about $3.45 a share.

    In the 8-k that Citi filed on Friday afternoon they said among other things that they expected to do a rights offering to employees at $3.25.   They also might do a rights offering to current equity holders.  I think that when all is said and done if Citi is really in trouble, one could see another 30 billion shares and another 100 billion in equity.  Some of this equity will probably come from leveraging the Trups and some from the gov't.  Some could come from the mandatory convert that Abu Dhabi holds.

    Why does this matter?  Because if there are 50 billion shares of Citi and Citi loses 100 billion dollars this year (nearly $20 on the old share count), there would still be $1.60 in TCE and the stock is at $1.50. (81 billion in equity and 50 billion shares more or less)  A solvent Citi is worth more than its tangible common equity.  A $100 billion write down would be the whole deferred tax asset plus all of the losses before the gov't guarantee on the 300 billion portfolio kicks in plus other losses in excess of 20 billion.

    It is almost certainly better to buy the pref than the common.  My sense (and other folks have posted earlier in the message thread) is that the discount to the soveregin wealth funds will be fairly small.  I base this on the dilution slide that came with the presentation.

    I am not sure, however, that the arb is superior to the outright long.   


    SubjectCiti common is a buy
    Entry03/01/2009 01:57 PM
    Memberdawkins920

    Or taking my example to the extreme, stakeholders and the gov't have to put in another $325 billion and get 100 billion shares.  Citi could lose another $200 billion and still have TCE of about $1.80  (121 billion shares and $200 billion of tangible common equity).  (Half from the government and half from the debt and the prefs)

    Citi is going to be solvent. The government is going to be a minority stakeholder.  The new equity is going to come in between $3.25 and $3.50.  The stock is simply trading too low.


    SubjectRE: Citi common is a buy
    Entry03/01/2009 09:26 PM
    Memberutah1009

    Dawkins, I disagree.

     

    1) The stress tests arent scheduled to be completed until the end of April.  I would emphasize the word "scheduled" because for something like Citi I think it's perfectly reasonable to expect it to take longer.  But anyway, your 20D moving average of $3.45 is quickly deteriorating every day the test lingers.  My guess is that by the time they're done the 20D MA will be $.75-1.50.  Of course, we have no idea how much new common equity a failed test will warrant, but the point is that that share count will probably be a lot higher than you think.

     

    2) A rights offering at $3.25?  An almost 200% premium to last trade??  Raising up to $100 billion from the public???  Ummm, no way.  Never.  Not even in some alternate universe where Ben Bernanke and Ron Paul admit to a passionate love affair and I'm married to Gisele Bundchen.  Seriously, the public outrage would be enormous.  This wont happen.  Ever.

     

    3) It's a joke that the conversion was set at $3.25 for the preferred.  I have a feeling that the Treasury employed the same method as when they picked the original TARP number: "we wanted to pick a big number."  Whatever, as someone who owns the TRUPS I could care less.


    SubjectRE: Citi common is a buy
    Entry03/02/2009 07:48 AM
    Memberutah1009

    Dawkins, still think the common is a buy after the HSBC rights offering just announced?


    SubjectRE: RE: Citi common is a buy
    Entry03/02/2009 08:09 AM
    Memberdawkins920

    Utah,

     

    The price for equity on the conversions is already fixed

     

    Conversion price is 90% of the average closing price for the common stock for the 20 trading day period ending February 9, 2009, subject to customary anti-dilution adjustments 

     

    This is directly from the term sheet the government put out.

     

    It is available here:  http://www.treas.gov/press/releases/reports/tg40_captermsheet.pdf 

     

    So yes, I still think Citi is a buy.


    SubjectUtah
    Entry03/02/2009 08:21 AM
    Memberdawkins920

    BTW, as someone who owns Trups, you should care.  Despite the fact that the Trups are cumulative, the divs can still be suspended.  If Citi takes further losses, the Trups are a likely target for a conversion offering.  They are quite likely to be part of the private capital if Citi needs to go back to the well and I think there is no question Citi is going to be able to go back to the well.


    SubjectRE: Utah
    Entry03/02/2009 08:38 AM
    Memberutah1009

    I had yet to see that term sheet.  My thoughts are this:

     

    1) When Citi fails their test and the stock is trading at $1.00, and the NYT starts reporting how the conversion price is ridiculous and screws taxpayers and every know-nothing politician jumps on the case, I think it'll be amended to $1.00.  The current conversion price is so ridiculous.

     

    2) Your analysis still assumes a rights offering at a 200% premium when HSBC just announced theirs at a 50% discount.  Aint gonna happen.


    SubjectRE: RE: Utah
    Entry03/02/2009 08:43 AM
    Memberdawkins920

    My point about the rights offering is that as of 3 pm on Friday, Citi thought it was not thoroughly embarrasing to put this to the market.

     

    The reason they did not think it was thoroughly embarrasing is that Citi now has access to a nearly infinite amount of equity capital at around $3.40.  

     

    My guess is that when people figure this out that Citi trades somewhere between $2.75 and $4.  Much like a bank demutualization tends to trade at a minor premium or discount to the conversion price.


    SubjectRE: RE: RE: Utah
    Entry03/02/2009 11:03 AM
    Membercharlie479

    >The reason they did not think it was thoroughly embarrasing is that Citi now has access to a nearly infinite amount of equity capital at around $3.40.

    Isn't the CAP term sheet good for only up to 2% of risk-weighted assets?  If that is about $20 bil and even if you coerce the TRUPs to exchange at $3.25 that only gets you to $44 bil.  Where would the rest of the $100 bil come from?  The common may be a buy but in the scenario you laid out where the company needs $100 bil of incremental capital, it seems very unlikely that it would all come in at $3.25.


    SubjectRE: RE: RE: RE: Utah
    Entry03/02/2009 12:34 PM
    Membersparky371

    Citi announces 95% value for pfds.

     

    7.3 shares per $25 par value.


    SubjectNHA
    Entry03/02/2009 01:18 PM
    Membercompass868

    Great job. total homerun.


    SubjectRE: NHA
    Entry03/02/2009 02:07 PM
    Membernha855

    Thanks - was putting it on yesterday at nearly 100% return at the open based on my initial 100% of par estimate. With the spread now down to 11% based on 95% of par, I am reallocating capital and taking some profits. I do think the Citi common looks intriguing based on the now similar credit ratios to JPM, but it's way too risky of a bet for me.


    SubjectDeal Ratios ae out
    Entry03/02/2009 02:27 PM
    Memberunkown345

    Commission File No. 1-9924

         
    Additional Information About Citi Proposal to Exchange
    Common Stock for Existing Preferred Stock and Trust Preferred Securities
      (CITI LOGO)
         On February 27, 2009, Citi announced that it will offer to exchange shares of its common stock for approximately $15 billion aggregate liquidation value of publicly held preferred stock and trust preferred securities at exchange factors to be announced. Additional information about the terms of the exchange offers is provided below. Publicly Held Preferred Stock      Citi will offer to acquire any and all issued and outstanding depositary shares representing shares of its Series F, Series AA, Series T and Series E preferred stock. Subject to the terms and conditions of the exchange offers and assuming 100% participation by holders of depositary shares representing these series of preferred stock, Citi will accept for purchase approximately $14.92 billion aggregate liquidation value of preferred stock, which would leave approximately $80 million in aggregate liquidation value available to accept trust preferred securities for purchase as described below.      The following table shows, with respect to each series of preferred stock, the aggregate liquidation value outstanding, the liquidation value per depositary share, the applicable exchange factor and the number of shares of common stock that Citi will offer per depositary share representing preferred stock.
                                             
                                Number of Shares
                Aggregate   Liquidation Value   Exchange Factor   of Common Stock
                Liquidation Value   Per Depositary   (as a percentage of   Offered Per
    CUSIP   Title of Securities   Outstanding   Share   Liquidation Value)   Depositary Share1
      172967556     8.500% Non-Cumulative Preferred Stock, Series F   $ 2,040,000,000     $ 25       95 %     7.30769  
      172967ER8     8.400% Fixed Rate/Floating Rate Preferred Stock, Series E   $ 6,000,000,000     $ 1,000       95 %     292.30769  
      172967572     8.125% Non-Cumulative Preferred Stock, Series AA   $ 3,715,000,000     $ 25       95 %     7.30769  
      172967598     6.5% Non-Cumulative Convertible Preferred Stock, Series T   $ 3,168,700,000     $ 50       85 %     13.0769  
    Publicly Held Enhanced-T ruPS ® and TruPS ®      Citi will offer to acquire an aggregate liquidation value of publicly held E-TruPS® and TruPS® of approximately $15 billion, less the aggregate liquidation value of all depositary shares representing preferred stock accepted for purchase in the exchange offers. We refer to this amount as the "Remaining Amount." The Remaining Amount will be equal to at least $80 million and will be higher in the event that less than all of the $14.92 billion aggregate liquidation value of issued and outstanding preferred stock is tendered and accepted in the exchange offers.      Because the aggregate liquidation value of E-TruPS® and TruPS® that Citi will accept for purchase in the exchange offers is limited to the Remaining Amount, Citi has assigned each series of E-TruPS® and TruPS® an Acceptance Priority Level (with Acceptance Priority Level 1 being the highest). Subject to the terms and conditions of the exchange offers, Citi will apply the Remaining Amount to accept for purchase all E-TruPS® or TruPS® with a higher Acceptance Priority Level before accepting any E-TruPS® or TruPS® with a lower Acceptance Priority Level. If Citi is unable to purchase all E-TruPS® or TruPS® with the same Acceptance Priority Level without exceeding the Remaining Amount, then Citi will purchase only a pro rata portion of the E-TruPS® or TruPS® with that Acceptance Priority Level. Citi will not purchase any E-TruPS® or TruPS® from a series with an Acceptance Priority Level that is lower than a series that has been subject to prorationing.
    (CITI LOGO)      The following table shows, with respect to each series of E-TruPS® or TruPS®, the Acceptance Priority Level (in order from highest to lowest), the aggregate liquidation value outstanding, the liquidation value per E-TruPS® or TruPS®, the applicable exchange factor and the number of shares of common stock that Citi will offer per E-TruPS® or TruPS®.
                                                         
                            Aggregate   Liquidation   Exchange Factor   Number of Shares
    Acceptance                   Liquidation   Value Per E-   (as a percentage   of Common Stock
    Priority                   Value   TruPS®   of   Offered Per E-
    Level   CUSIP   Title of Securities   Issuer   Outstanding   or TruPS®   Liquidation Value)   TruPS ® or TruPS ®2
      1     173094AA1   8.300% E-TruPS®   Citigroup Capital XXI   $ 3,500,000,000     $ 1,000       95 %     292.30769  
      2       173085200     7.875% E-TruPS®   Citigroup Capital XX   $ 787,500,000     $ 25       95 %     7.30769  
      3       17311U200     7.250% E-TruPS®   Citigroup Capital XIX   $ 1,225,000,000     $ 25       95 %     7.30769  
      4       17309E200     6.875% E-TruPS®   Citigroup Capital XIV   $ 565,000,000     $ 25       95 %     7.30769  
      5       17310G202     6.500% E-TruPS®   Citigroup Capital XV   $ 1,185,000,000     $ 25       95 %     7.30769  
      6       17310L201     6.450% E-TruPS®   Citigroup Capital XVI   $ 1,600,000,000     $ 25       95 %     7.30769  
      7       17311H209     6.350% E-TruPS®   Citigroup Capital XVII     1,100,000,000     $ 25       95 %     7.30769  
      8     172988AB3   6.829% E-TruPS   Citigroup Capital XVIII   £ 500,000,000     £ 1,000       95 %   418.526153
      9     1730FHAA6   7.625% TruPS®   Citigroup Capital III   $ 200,000,000     $ 1,000       95 %     292.30769  
      10       17306N203     7.125% TruPS®   Citigroup Capital VII   $ 1,150,000,000     $ 25       95 %     7.30769  
      11       17306R204     6.950% TruPS®   Citigroup Capital VIII   $ 1,400,000,000     $ 25       95 %     7.30769  
      12       173064205     6.10% TruPS®   Citigroup Capital X   $ 500,000,000     $ 25       95 %     7.30769  
      13       173066200     6.00% TruPS®   Citigroup Capital IX   $ 1,100,000,000     $ 25       95 %     7.30769  
      14       17307Q205     6.00% TruPS®   Citigroup Capital XI   $ 600,000,000     $ 25       95 %     7.30769  
    Additional Terms of the Exchange Offers The exchange offers have not yet commenced. Consummation of each exchange offer will be subject to the satisfaction, or waiver by us, at or prior to the expiration of the exchange offers, of a number of conditions. We will describe additional terms of the exchange offers, including the conditions, in a prospectus and related exchange offer materials that we will file with the Securities and Exchange Commission. In no event will Citi accept for purchase any depositary shares representing preferred stock or trust preferred securities to the extent that doing so would require Citi to issue a number of shares of common stock in excess of its currently authorized share capital. Citi will continue to pay distributions on the E-TruPS® and TruPS® at the current rates. Citi is offering to acquire a limited number of E-TruPS® and TruPS®, and as a result, holders of E-TruPS® and TruPS® may be subject to prorationing as described above. In connection with the transactions, Citi will suspend dividends on its preferred stock. Citi is offering to acquire any and all depositary shares representing preferred stock, and holders of these shares will not be subject to prorationing.  



    2   Number of shares of common stock offered per TruPS® or E-TruPS®calculated by multiplying (a) the liquidation value per TruPS® or E-TruPS®by (b) the Exchange Factor, and dividing this amount by $3.25, the price at which Citi is valuing the common stock to be issued in the exchange offers.
     
    3   U.S. dollar equivalent values for the 6.829% E-TruPS® calculated based on the U.S. dollar/U.K. pound exchange rate of $1.4318 on February 27, 2009.

    2


     

     

     

    (CITI LOGO) In connection with the proposed exchange offers, Citi will file with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form S-4 and a tender offer statement on Schedule TO that will contain a prospectus and related exchange offer materials. Citi will mail the prospectus to the holders of depositary shares representing its series of convertible and non-convertible public preferred stock and E-TruPs and TruPs that may be eligible to participate in the exchange offers. Holders of depositary shares representing these series of preferred stock, and E-TruPs and TruPs are urged to read the prospectus and related exchange offer materials when they become available because they will contain important information. You may obtain a free copy of the prospectus and related exchange offer materials (when available) that Citi will file with the SEC at the SEC's website at www.sec.gov. The prospectus and related exchange offer materials (when they become available) may also be obtained for free by accessing Citi's website at www.citigroup.com and clicking on the link for "Investors" and then clicking on the link for "All SEC Filings" or by contacting Citigroup at the following address or telephone number: Citigroup Document Services, 540 Crosspoint Parkway, Getzville, NY 14068, or within the United States, at +1-877-936-2737 or outside the United States, at +1-716-730-8055, or by e-mailing a request to docserve@citigroup.com.

    3

     


    SubjectSpread widening?
    Entry03/16/2009 12:28 PM
    Memberladera838

    With Citi up over 30% today (currently at $2.37), why is the preferred only up 14% (currently at $13.77).  At these prices, and the conversion ratio of 7.3 shares, the arbitrage spread has widened to over 25%.

    What am I missing?  I would love to hear your thoughts.

    Thanks.


    SubjectRE: 27% spread for a couple weeks
    Entry04/01/2009 11:30 PM
    Memberunkown345

    Why do you think it could close by the end of April?

    If the tender has to be open for 20 days, for that to happen the S-4 would have to not be reviewed (and likely not refiled with amendments).

    What is Citi IR saying about it these days?

     

     


    Subject27% for a coupl of weeks
    Entry04/04/2009 10:17 AM
    Membertyler939

    I thouht that this would be a fast track priority for everyone involved, but that is clearly no the case.  It took them a hell of a long time to file the S-4, and the SEC does not seem to be in a hurry to turn it around.  My biggest concern is that as the stress test proceeds, they will have to revise the documents to include new disclosure.  I am pretty confident the transaction eventually closes, but with a negative rebate in the high 80's, as the delays continue, the total return is approaching single digits.


    SubjectIs there any reason C can't change the terms?
    Entry04/13/2009 06:03 PM
    Membertyler939

    I am not suggesting this will be the case, but was wondering if there is any legal reason C would be prohibited from changing the terms of the exchange offer?


    SubjectRE: Thoughts
    Entry04/17/2009 08:00 AM
    Memberedward965

     

    Majic/all,

    I have no position but wondered - if you take current share price in pre market ($4.6), then the preferred converts at $33.61.

    Does it make sense that the preferred would end up trading very significantly above par ($25)?  It just seems odd.  No one bought the preferred much above par, so everyone "is even" with the preferred, which is much better than what happened to the common shareholders. 

    If we use par as the new conversion ceiling, then the 25% spread, minus rebate, = mediocre returns.  Of course, if citi common drops a lot, perhaps you could make money on the short, but that sword could cut both ways.

     


    SubjectRE: RE: Thoughts
    Entry04/17/2009 09:43 AM
    Membermajic06

    question: do you think its conceivable the preferred offer doesnt go forward?  "i think there is a 5% chance the sun doesnt come up, but the short answer is no"

    numerous other questions were answered definitively that they will not change the terms of the offer.


    SubjectRE: RE: RE: Thoughts
    Entry04/18/2009 09:18 PM
    Memberedward965

    I agree with you as a directional trade, but think the "risk free" arb trade misses something.

    Let's take this to a logical extreme.  C common stock hits $10/share, which means $73 per Preferred (vs. $25 par).  Common shareholders are still way underwater but Preferred shareholders are way, way ahead.  Preferred holders are generally par players and would like be happy with $25 or so, maybe a bit more.  It seems highly unfair to have common shareholders way down and Preferred be up 3x on their par, which might be the best return on Preferreds from par ever in history.  If the exchange is capped at $25 or so, only the arbs get hurt vs. the original entry price, which seems acceptable to hurt arb players, and preferreds are all super happy because they get everything they ever wanted (par) from a distressed company.

    Could C common hit $10?  I sure don't think its worth that, but everyone on the Volkswagen board thought 25x PE was insane...right before it hit 100x or whatever.

    The risk free arb trade, as I see it, is to add a call option (say a $4 strike for June) to the mix to protect against Preferreds being worth much more than $25.

    So, the trade is:

    Short the 7.30769.. shares of common for               +$26.67

    Buy 1 Preferred for                                                -$19.13

    Buy 1 call option per common share ($.56/eac)          -$4.1

    and pay a rebate (-80%) for two months                    $-3.5

    Net gain:                                                                 Zero

     

    I think without the call option it's a directional trade on citi common stock, which I strongly agree with, but its not a true arbitrage and is why I stayed away, rightly or wrongly.

     

     

     


    SubjectRE: RE: RE: RE: Thoughts
    Entry04/18/2009 09:21 PM
    Memberedward965

    Also, my thought that a call option is needed for the trade could explain why the spread narrows when C common shares go down, and the spread widens when it goes up. 

    If one doesn't add a call option but needs one, then they are effectively short a call option, which means when the common goes down you make money, and when the common goes up you lose money.

     


    SubjectRE: RE: RE: RE: Thoughts
    Entry04/19/2009 02:18 PM
    Membermajic06

    I think there a few things I disagree with:

     

    1)  Govmt and Private preferred deals are definitive.  Done.  We are only talking about the public preferreds.  The majority of the dillution is already locked in place.  No way they are going to recut the price on the government preferreds - congress would be outraged. For once tax payers are set to make money (on paper) and they are going to take that away?

    2)  If you listen to that conference call the CFO, who is new, made it extremely clear they are not going to recut the price of the preferreds or not go through with the deal.  Where is his upside to lie?  He could have hedged his answer over and over but the only hedge he gave to any of the questions was "there is a 5% chance the sun doesn't come out".  This is a major institution, not some rinky dink bank.  They would look like fools changing the price of the deal today after that conference call. 

    3)  Again, the price of conversion is $3.25 which was based on a trailing average of C common stock.  If you did the excercise today you'd get - less than $3.25. 

    4)  Preferred holders are not getting cash for their shares - they are getting stock.  I think its false to assume they are getting taken out above par since it's a stock swap and the day the deal gets done C stock could collapse and what was once a 50% premium to par is now par or less. 

    5)  I disagree with your analysis regarding the "Net Gain" if you were to use a call option.  You assume in your analysis that the call option expires at 0.  If the downside is "0" but the upside is a free call option on C stock, you'd make out huge.  For instance, if C goes to $8 and the deal gets recut, while it's hard to see how much you'd lose on the preferred in that scenerio, you'd make a ton on the call. 

    6)  Management is aware that C stock is impossible to borrow and that the public price on C shares is not necessarily indicative of what the market thinks its worth.  One need to only look at the option market to see what you can create a long C at a huge discount to the current market price.  Given that the govmt and the private preferreds are definitive, I'm not sure they are going to mess around with saving a bit of dillution given all I've said above. 

     

    Last point:  I think your 2 months is too long.  The stress tests are due the first few days of May.  I think the exchange opens by May 10 and closes by the end of May, which is more likely 5 weeks - or a cost of 8-10% in total.  Also, we now get a dividend in the meantime which offsets this cost by 2.5%, at current yields.

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