Wednesday, financial service provider Citigroup, Inc. (C) followed Bank of America and Wells Fargo with a partial repayment of the U.S. Government bail-out funds received under the Troubled Asset Relief Program in October 2008. Citi made a part payment of $20 billion through a combination of stock and debt offerings. In addition, Citigroup also terminated the loss-sharing agreement with the Treasury.
The Troubled Asset Relief Program, or TARP, was set up last year to prop up the U.S. financial system after big bets on mortgage-related assets pushed many institutions toward collapse. Following the collapse of Lehman Brothers Holdings Inc. (LEHMQ.PK), as well as several other events that rocked the financial sector last year, the federal government stepped in, providing bank holding companies access to a $700 billion rescue plan.
The New York-based Citi today paid back $20 billion of a total of $45 billion fund it received from the U.S. government's TARP Program, pursuant to the successful completion of a securities offering.
In order to repay the $20 billion, Citi issued $20.5 billion of capital and debt, comprising $17 billion of common stock, with an over-allotment option of $2.55 billion, and $3.5 billion of tangible equity units, consisting of about $2.8 billion of prepaid common stock purchase contracts and about $0.7 billion of subordinated notes.
Citi had also decided to issue $1.7 billion of common stock equivalents in January 2010 to employees in lieu of a portion of 2009 cash compensation they would have otherwise received. The common stock equivalents will then be replaced by common stock, subject to shareholder approval at the company's annual meeting on April 1, 2010.
In addition to the TARP repayment, the company also terminated the $1.8 billion of the $7.1 billion loss-sharing agreement with the Treasury. Earlier, Citi issued $7.1 billion in trust preferred securities to the government as consideration for the benefits provided by the agreement.
Citi had said that it would benefit from the the repayment and the termination of loss-share agreement, through a net reduction in annual interest expense of about $1.7 billion and about $0.5 billion in lower annual amortization expense associated with the loss-sharing agreement.
However, as announced earlier, the Treasury extended its lock-up period on the sale of its 7.7 billion share common equity stake to 2010. The Treasury has also decided not to sell any of its shares in connection with Citi's sale of common stock and tangible equity units.
Previously, the Treasury in connection with Citi's $17 billion common stock offering had said it would sell up to $5 billion of its common stock via a concurrent secondary offering, subject to a 45-day "lock-up" period. The Treasury had announced that it plans to exit the remaining of the 34% equity stake in Citigroup over the next 6-12 months. The Treasury, however, has now decided not to sell any of its shares in connection with Citi's sale of common stock and tangible equity units.
Upon the closing of the TARP aid, Citi's pro forma Tier 1 capital ratio at the end of the third quarter of 2009 would have been 11.0%, compared with 12.8%. The company's pro forma Tier 1 common ratio at the end of the third quarter would have been 9.0%, compared with 9.1%.
During June 2009, major American banks including Morgan Stanley (MS), JPMorgan Chase & Co. (JPM), Goldman Sachs Group, Inc. (GS), U.S. Bancorp (USB) and BB&T Corp. (BBT), repaid the capital received as bail-out funds under the TARP.
However, there were lot of restrictions on banks in repaying the TARP fund, with the government insisting on stress test clearance to ensure the banks stand-up to any further deterioration in the economy. The tests found that if the recession were to worsen, losses at the nineteen banks during 2009 and 2010 could total $600 billion. The banks involved in the exercise account for two-thirds of the assets and more than half the loans in the U.S. banking system.
Last week, Bank of America Corp. (BAC) repaid the U.S. Treasury a $45 billion of the government investment in the company as part of the TARP, pursuant to the bank's closing of securities offering.
Today, Wells Fargo & Co. (WFC) repaid the $25 billion to the U.S. Treasury availed by the company in October 2008 under the Troubled Asset Relief Program on completion of a $10.4 billion underwritten common stock offering.
C closed Wednesday's regular trading at $3.29, down $0.05 or 1.50%, on a volume of 355.74 million shares, with a three-month average volume of 513.02 million shares. The stock further lost $0.01 or 0.30%, trading at $3.27 in after hours.
For comments and feedback: editorial@rttnews.com