Citigroup must be in big trouble if they are paying 11% on these debentures.
As a CPA, I do not expect they will get any benefit from the interest payments they will have to make on the debt payments to the Arabs during the next few years they paying them all this interest.
How many investors on this board have ever been willing to pay 11% interest for borrowing money?
I am assuming that Citi has $10B-20B in bad debts on the books. They are writing this off in 2007 and 2008 as the mortgages go under and home owners keep taking hits by declining real estate values.
So, I conclude that the 11% interest rate is much higher than existing junk bond debt, so they are desperate. This tells me things are probably going to get worse so they made a deal. Remember, if they continue to sink in more and more bad home loans and related debt shennanigans, the Arab investment will not want shares that have no priority in debtor reorganizations.
11% is the rate for a couple of years, then the preferred shares must be converted into common stock. Given that this money is fresh capital on the books, Citi can loan out 10x this amount on credit cards, ets at 20% and make 14 billion a year profit, take out a few billion for costs, and Citi can still make a nice profit. The negative is the dillution to current shareholders. Still tons of mortgages to reset, questionable leadership, credit card loans likely to default...bad bets on financial markets...legal battles over SIV debt, and huge insurance liability due to SIV guatantees.
I do hope this whole credit crunch thing doesn't spill over to the credit card market. If customers in that sector start to default on their credit card loans, as they have done on their mortgages, it will be a real big mess. And if Citi makes credit card loans from this new capital they've got and get into another credit (card) crunch, that will be a true double whammy.
I will show my age on this, but paying 11% interest was quite common during the late 1970's and early to mid 1980s.
Utility stocks routinely yielded 9% to 15%, money market funds paid 17% for a while and long term treasuries would yield in the mid teens.
Consider what happened back then. There was a tremendous amount of deficit spending to support a foreign police action and an explosion of entitlement programs at home. Gasoline had jumped from 25 cents per gallon to 50 cents and was rumored to be going to a dollar a gallon. The big mortgage lenders, Savings and Loans, were in trouble and the government money printing presses worked overtime right after our money was finally debased from any monetary backing. The purchasing power of the dollar fell drmatically.
Sound familiar? Defecit spending is back in vogue. the The Iraq situation, Medicare and medicaid, welfare, corporate tax cuts, fuel price surges, the mortgage company situation, a Federal Reserve that is focused on devaluation of the dollar and M3 is surging. The only thing that I see different is outsourcing of jobs, that has prevented a wage rate spiral this time around.
If the aforementioned instruments are priced in dollar terms, it seems to me that 11% is quite reasonable under the circumstances. The lenders are entitled to a return on their investment as well as an inflation factor to assure that they due not suffer a loss in purchasing power due to the dollars continuation of decline in value in the world market.
It is unfortunant that the politicians have chosen to once again to use a kick the can down the road approach by devaluing the currency with the hope that in the long run time heals everything. It never really has worked. On the other hand it must be the will of the people; the people elected these politicians in the first place.
Something to consider next time you are at the gas pump. The price of gas is not going higher, it is instead the continuing of the decline of the purchasing power of your dollar.
In short, 11% seems pretty reasonable to me under the circumstances; I am surprised they did not demand 15%
that's what is happening if people live beyond their means. Buffett told you in 2003, read "Squanderville versus Thriftville".
I keep my Euros ready to get my share of your nice country.
And the profits can only go down without the most lucrative high margin channels (m&a, mortgage packaging, private equity being empty). They will just be a bank, albeit, a global bank. And now with this ... one wonders. I think there will be a bounce or two and then down ...
Even their worst mortgage loans are not made at 11% interest. And to salvage that, they are borrowing at 11%? It just doesn't add up. Plus, this is a stock dilution in 2010 & 11 & for US investors. Bad boys making bad deals. I expect a Short term pop-up in PPS by dumb investors and then the slide/saga continues. JMHO
Read the release: "Substantially all of the investment proceeds will be treated as Tier 1 capital for regulatory capital purposes."
You obviously have no idea what this means? (hint: this is not a loan)
this is a really bad deal for c. i can't believe they are in such deep doo doo they need to do this sort of loser deal. they have 85 billion in bad siv exposure i guess they must be getting desparate. this indicates actual fear for their survival... sign of the times.