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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 30, 2008 12:01 AM ET
AP
HANDS OUT? Citi CFO Gary Crittenden
In exchange for $27 billion in preferred shares and warrants to buy enough common stock to make the Treasury Department Citi’s largest shareholder, the beleaguered bank got an outsize insurance policy: The U.S. government pledged to guarantee losses on $306 billion in primarily real estate-related assets. Because the protection from losses will allow Citi to devote fewer resources to backing the risky assets, the move effectively represents a total capital infusion of $40 billion, Citi said. That’s on top of the $25 billion it has already received from the Treasury under the Troubled Asset Relief Program, not to mention $50 billion it already raised for itself in the public and private markets. The additional lifeline seems likely to keep Citi afloat for now. It certainly buoyed the mood of the company’s executives, judging from what CFO Gary Crittenden told Reuters: “We had to put behind us the issue of Citigroup’s ability to withstand whatever would come.” But that doesn’t mean Citi is in the clear, because what the government’s assistance program doesn’t cover is as significant as what it does. Since Citi had about $314 billion worth of mortgage loans and securities in the third quarter, CreditSights analyst David Hendler said, it’s likely that the guarantee covers this pool. Citi also has about $790 billion in credit card receivables, non-U.S. consumer loans, corporate loans, derivatives and other assets, Mr. Hendler noted. “We believe that these assets are not guaranteed by the U.S. government for the most part and are not immune to weakness in the overall economy,” Mr. Hendler wrote in a note to clients last week. Some $91 billion in credit card receivables could be particularly vulnerable. During a conference call announcing third-quarter results in October, Mr. Crittenden explained that rising unemployment rates historically have been closely correlated with losses in its cards portfolio. Citi sees unemployment rising to between 7% and 9% next year, he said, compared with 6.5% in October. “Obviously, such unemployment levels could result in significantly higher credit costs well into 2009,” he said. Fitch Ratings analysts see the same trend looming over the credit card business at large, they wrote in a research note last month, which “does not bode well for credit metrics in the remaining months of 2008 and into 2009, as many economists expect further deterioration of the unemployment rate.” If anything, Citi’s credit card holdings could be even more sensitive to the economy’s woes next year than they have been in the past. As unemployment rose about two percentage points over a two-year span during and immediately after the recession of the 1990s, Citi’s card-related charge-offs climbed around 1.75 percentage points. From the beginning of 2007 to last September, the jobless rate rose 1.7 percentage points while losses on Citi’s credit card portfolio climbed some 2.5 percentage points, Fitch found. In total, Citi could face as much as $60 billion in additional loan losses over the next few years, with credit cards causing a big chunk of the pain, not to mention $20 billion in write-downs, Deutsche Bank analyst Mike Mayo wrote in a research report last week. Losses on loans to customers outside the U.S. could extend the company’s worries, because the effects of what the International Monetary Fund called a “global recession” will likely hit Europe and Asia later, Mr. Mayo wrote. Gary Townsend, a former bank regulator and analyst who is now a principal of Hill-Townsend Capital, an investment firm focused on financial services companies, said the health of the economy will play a big role in determining whether the Treasury and FDIC’s steps are enough. “What they’re going through is a process,” he said. “Whether the capital is sufficient will depend on the economic downturn, how prolonged it is and its depth.” The ratings agencies are still muted about Citi’s prospects, even with the guarantee. Indeed, Fitch Ratings lowered Citi’s rating to A+ from AA- last week because of concerns about asset quality in a weaker economy. At the same time, it also removed Citi from “watch negative” after the government stepped in. Moody’s Investors Service and Standard & Poor’s were similarly cautious. Moody’s said it is still reviewing Citi for a possible downgrade, and S&P kept Citi on “watch negative.” If push comes to shove, Citi certainly has a lot of options at its disposal. The bank said last week, when it released the terms of its new agreement with the Treasury and FDIC, that it can also use the Federal Reserve’s Primary Dealer Credit Facility and the discount window, not to mention the Commercial Paper Funding Facility and the FDIC’s Temporary Liquidity Guarantee Program. Citi’s coffers may also get a boost from the Treasury’s new Term Asset-Backed Securities Loan Facility (TALF), which helps banks continue to make auto, student, credit card or small business loans to consumers, and to securitize them. Under the plan, the Treasury and the New York Fed will make one-year loans to financial institutions, using up to $200 billion from the TARP plan and the New York Fed itself. Barclays analyst Jason Goldberg observed in a note Wednesday that Citi is one of the large banks that will benefit from “any improvement in ABS market conditions.” And if all else fails, it may also raise more capital through selling additional common equity, a possibility that UBS analyst Glenn Schorr raised last week. “We think losses will continue to eat into Citi’s capital position (that’s an exposure thing and an environment thing), and it looks increasingly likely that Citi will eventually need to issue common equity to help improve its capital structure,” Mr. Schorr wrote. “Citi still has a pretty big balance sheet that includes plenty of exposures that could continue to deteriorate in this tough economy, including cards, [commercial and industrial], and international loans. So, while today’s transaction no doubt helps, we keep it in perspective of the big picture, which still has headwinds.”
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