|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|
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|
|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|
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.
|Entry||02/27/2009 12:23 PM|
Are you advising a short of the common here...I must be missing something
|Entry||02/27/2009 12:28 PM|
What is the symbol you are using for this security?
|Entry||02/27/2009 12:32 PM|
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.
|Entry||02/27/2009 12:33 PM|
On bloomberg you would type C AA Pref <Go>. The CUSIP is 172967572. The stock is liquid (24mm shares traded today).
|Entry||02/27/2009 01:28 PM|
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...
|Subject||RE: Be careful|
|Entry||02/27/2009 03:15 PM|
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.
|Subject||RE: RE: Be careful|
|Entry||02/27/2009 04:36 PM|
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."
|Subject||RE: RE: RE: Be careful|
|Entry||02/27/2009 05:49 PM|
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.
|Subject||you dont get par|
|Entry||02/27/2009 11:11 PM|
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
|Subject||RE: you dont get par|
|Entry||02/28/2009 07:23 PM|
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.
|Subject||RE: RE: you dont get par|
|Entry||02/28/2009 07:35 PM|
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.
|Subject||Citi is now like a bank demutualization|
|Entry||03/01/2009 01:43 PM|
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.
|Subject||Citi common is a buy|
|Entry||03/01/2009 01:57 PM|
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.
|Subject||RE: Citi common is a buy|
|Entry||03/01/2009 09:26 PM|
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.
|Subject||RE: Citi common is a buy|
|Entry||03/02/2009 07:48 AM|
Dawkins, still think the common is a buy after the HSBC rights offering just announced?
|Subject||RE: RE: Citi common is a buy|
|Entry||03/02/2009 08:09 AM|
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.
|Entry||03/02/2009 08:21 AM|
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.
|Entry||03/02/2009 08:38 AM|
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.
|Subject||RE: RE: Utah|
|Entry||03/02/2009 08:43 AM|
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.
|Subject||RE: RE: RE: Utah|
|Entry||03/02/2009 11:03 AM|
>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.
|Subject||RE: RE: RE: RE: Utah|
|Entry||03/02/2009 12:34 PM|
Citi announces 95% value for pfds.
7.3 shares per $25 par value.
|Entry||03/02/2009 01:18 PM|
Great job. total homerun.
|Entry||03/02/2009 02:07 PM|
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.
|Subject||Deal Ratios ae out|
|Entry||03/02/2009 02:27 PM|
Commission File No. 1-9924
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®.
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 firstname.lastname@example.org.
|Entry||03/16/2009 12:28 PM|
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.
|Subject||RE: 27% spread for a couple weeks|
|Entry||04/01/2009 11:30 PM|
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?
|Subject||27% for a coupl of weeks|
|Entry||04/04/2009 10:17 AM|
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.
|Subject||Is there any reason C can't change the terms?|
|Entry||04/13/2009 06:03 PM|
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?
|Entry||04/17/2009 08:00 AM|
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.
|Subject||RE: RE: Thoughts|
|Entry||04/17/2009 09:43 AM|
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.
|Subject||RE: RE: RE: Thoughts|
|Entry||04/18/2009 09:18 PM|
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.
|Subject||RE: RE: RE: RE: Thoughts|
|Entry||04/18/2009 09:21 PM|
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.
|Subject||RE: RE: RE: RE: Thoughts|
|Entry||04/19/2009 02:18 PM|
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.