Citigroup stake sale fetches $4.5 billion; exceeds target by 50 per cent
01 May 2008
Citigroup announced on Wednesday that it had raised capital by selling $4.5 billion of stock, 50 per cent more than was initially planned (See: Citigroup to raise $3 billion in capital through fresh stock sale). However, this announcement came as no surprise to Wall Street as the bank's chief financial officer Gary Crittenden had earlier announced that the issue size may be increased depending on the market response. Citigroup also said it might boost the offering to $4.95 billion to meet demand.
Evidently, the market had responded enthusiastically to warrant the additional stake sale. However, the broader markets were less enthused when news broke that the sale of 178.1 million shares had been concluded at $25.27 each, a four per cent discount to yesterday's closing price of $26.32.
As a result, the stock fell by as much as four per cent in New York trading. However, this is small change compared to the 52 per cent it has already declined this year.
New York-based Citigroup is one of many banks, including Bank of America Corp and Wachovia Corp to raise capital this year by issuing preferred or common stock. The bank's previous capital-raising efforts included the sale of equity to investment funds controlled by foreign governments in Abu Dhabi, Singapore and Kuwait.
Last week Citigroup sold $6 billion of preferred shares, a bond-like security that isn't dilutive to common shareholders, after it reported a $5.1 billion first-quarter loss and cut 9,000 jobs. (See: After Merrill Lynch losses and job cuts, Citi loses $5.11 billion in Q1; to cut 9,000 jobs)
In total, the bank is estimated to have raised more than $40 billion in capital during the past five months, a move that has seen its current shareholding diluted by 20 per cent. This was necessitated by the more than $46 billion it was forced to write down as a result of the sub-prime mortgage crisis, making it one of the hardest hit amongst banks. Analysts predict more capital-raising in the near future by selling shares or assets.
The new equity, when combined with the preferred stock sold last week, will raise Citigroup's so-called Tier 1 capital ratio to about 8.6 per cent, the company said. The ratio, used to gauge a bank's ability to withstand loan losses, was 7.7 per cent at the end of March.
Regulators consider banks with a Tier 1 ratio of 6 percent ''well capitalized.'' Citigroup sets its Tier 1 target at 7.5 percent, to give itself a margin of error and help avoid a downgrade of debt ratings.
