Investor relations http://www.citigroup.com/citi/fin/ Press release (HTML) http://www.citigroup.com/citi/press/2009/090227a.htm Transaction summary (PDF) http://www.citigroup.com/citi/press/2009/090227a.pdf Presentation (PDF) http://www.citigroup.com/citi/fin/data/p090227a.pdf As per Zerohedge, Footnote 2 in the presentation describes the different treatment for the different security holders.
I think there is some risk in the (long preferred + short common) trade, as described in Zerohedge's blog: http://zerohedge.blogspot.com/2009/02/reason-for-todays-persistent-decline-in.html ie, if the publicly issued preferred are converted at a price higher than $3.25, then the preferred stock doesn't give you as many shares of common as it would at a conversion of $3.25. I'm staying away from the preferred, because although I've done a bit of reading in the last hour, I'm not sure that I 100% understand the situation. The big "ifs" are how many publicly issued preferred are converted, and at what price.
Another story - this time from CNN. However it does not mention the issues noted by Zerohedge. http://money.cnn.com/news/newsfeeds/articles/djf500/200902271734DOWJONESDJONLINE000964_FORTUNE5.htm
DJ Newswires Citigroup Prefers Some Preferred Shareholders Over Others By Marshall Eckblad and Andrew Morse Of DOW JONES NEWSWIRES SAN FRANCISCO (Dow Jones)--Some of Citigroup Inc.'s (C) preferred shareholders are more preferred than others. 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. Owners of Citigroup's privately-placed preferred shares, which include the U.S. government, will have their holdings converted based on the price of their original investment even though the bank's share price has collapsed since they were made. But owners of Citigroup's publicly traded preferred shares won't get as sweet a deal. They will be converted at an as-yet-undetermined premium to the market price. On Friday, the bulk of Citigroup's different classes of publicly traded preferred shares closed at less than 40% of their original values, with most settling between $8 and $10. Citigroup didn't explain in its press release the uneven treatment of its preferred shareholders, which essentially treats some investors based on the book value of their holdings and others based on the market value. But one reason for the complicated deal structure could be that the bank wants to keep its funding options open. At the current depressed common stock price - Citigroup shares closed at $1.50 after touching a fresh 52-week-low on Friday - issuing new common stock is almost certainly out of the question. By protecting buyers of privately placed shares - like the U.S. and Singaporean governments, as well as Saudi Arabian Prince Alwaleed Bin Talal - Citigroup may be keeping its funding options open if it needs to tap markets for capital again, since it will be showing its willingness to take care of investors who agree to take a large-sized risk on the shaky bank. "It shows they are not trying to slam the door, which is what [happened] with Fannie and Freddie," said Donald F. Crumrine, the chairman of Pasadena, Calif.-based Flaherty & Crumrine Inc., an investment adviser specializing in preferred securities. Crumrine was referring to the government seizure of mortgage giants Federal National Mortgage Association (FNM), also known as Fannie Mae, and Federal Home Loan Mortgage Corp., known as Freddie Mac. (FRE), which hurt both preferred and common shareholders alike. A Citigroup spokeswoman declined to comment. While the deal may be good news for the bank's prospects, it has some holders of its publicly traded preferred shares hopping mad. They feel like Citigroup has given them short shrift, even though they have already suffered as the bank's shares wilted from near all-time highs just 18 months ago. "It's incredibly frustrating," said Christopher M. Brown, the president of Lexington, Ky.-based Aristides Capital LLC, "both as a money manager and as a citizen." Brown holds Citigroup preferred shares. What's more, a number of investors said in interviews Citigroup's statement sewed confusion in the market, since investors were unsure how to gauge the value of the bank's preferred shares. Citigroup has said it will announce the redemption values of its public preferred shares in a filing with the U.S. Securities and Exchange Commission, but the bank didn't say when that data will be available. As a result, prices on some of the bank's preferred shares swung wildly on Friday. One series of preferred shares fell below $5 in morning trading before soaring to well above $9 - all before noon. The shares finally ended the day above $8 per share. "It was total confusion this morning," said Brown. Of course, even the holders of the publicly traded preferred shares are doing better than the holders of Citigroup's common stock. After Citigroup converts its preferred shares - both privately placed and publicly traded - common stock shareholders will be diluted by 74%, according to David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller LLC. Calculated from Friday's closing price, that would push Citigroup's common shares to a value of 39 cents. -By Marshall Eckblad and Andrew Morse, Dow Jones Newswires; 201-938-4306; marshall.eckblad@dowjones.com (Ian Salisbury and Maxwell Murphy contributed to this report.)
There is a assumptions (big if) that common share will stay low around below 2, if common raise significantly this arbitrage wouldn't works. Preferred share face value at $25. 25 / 3.25 = 7.7 7.7 x 1.5(today's common price) = 11.55 so the preferred share worth 11.55 at today's common share price, while the preferred share traded below before the deal, so the rally for preferred share.
Oh, man, why is that? Maybe it's because CNN's money center is a fucking joke. They have no analysts on hand at all, and their market commentators couldn't explain a black-scholes model to a Phd.
How about: 20 to 1 leverage debt to assets -$5 per share earnings. $1.5 stock This equates to a $0 company, but would be negative if stocks could be worth less than 0.
Only if Obama administration has the stomach for C go bankrupt, which I highly doubt it. Therefor, around 1.5 is perfect price for people short this stock from high 20s even 30s to cover. Beside, C could be the next HSBC, it has many outlets around world.
The release says 'significant premium' whatever that is I believe will be more than 20%. The problem of course is that every smart arb will spend the entire weekend thinking about this and pounce on monday till there is no edge ajdusted for the risk you take