So how, as the world’s largest bank, do you impart news that you have had to seek an emergency capital injection from a country many of your customers have never heard of, at almost two and a half times the Fed’s target lending rate?
First, there is the usual guff distributed in the press release.
Then, much more importantly, come the press briefings, hopefully managing the tone of coverage in the leading media outlets.
And so the Wall St Journal, helpfully, tops its own story with a Middle Eastern focus:
The investment underscores the growing role that Middle Eastern investors are taking outside their home turf. Separately yesterday, an investment company owned by Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, bought a stake in Sony Corp. ADIA, which has almost $1 trillion under management, this summer bought a small stake in Apollo Management LP.
Before stating, pointedly:
Citi is paying a higher interest rate than companies that borrow on the high-yield, or junk-bond, market; currently they pay roughly 9% for straight bonds. Typically, convertible bonds pay lower interest rates than straight bonds, although a particular bond’s structure could affect the interest rate paid.
In the FT, David Wighton puts the news in the first paragraph: this is “an attempt to shore up its overstretched balance sheet,” adding:
The high cost of the new funds highlights Citi’s determination to meet its commitments to strengthen its balance sheet and carry on investing while maintaining its dividend.
Deeper into the FT story, things get intriguing:
The 11 per cent coupon, which is largely tax deductible, represents a slight premium to the yield on Citi’s shares.
Citi’s shares, which have almost halved this year, tumbled 6 per cent to $29.76 on Monday, pushing the yield above 7 per cent…
Mr Bischoff said the investment would enable Citi to access capital in “an efficient manner” and was consistent with its strategy of maintaining a balance sheet that benefits from highly diverse sources of funding in terms of both geography and type of security..
There have been a couple of dozen large issues of such securities in the past few years, including by companies such as Fortis and CIT. The yield premium and average conversion premium in the Citi deal are in line with the average for previous deals, according to a senior executive.
Similar spin could be found in Reuters’ main take:
The securities will also pay a fixed coupon of 11 percent per year, payable quarterly. That may seem steep, but after accounting for the fact that 60 percent of that coupon is tax-deductible, the coupon rate is similar to the dividend rate on Citi’s shares, a person familiar with the matter said.
Really? Does Win Bischoff, City grandee and caretaker CEO at Citi, really believe this allows Citi to access capital in “an efficient manner”? Efficient in an emergency, jerk-reaction sense, perhaps; not, surely, in terms of cheap finance.
And why this highlighting of the fact that interest payments on the notes will be tax deductible (like most forms of debt)? And does 11 per cent represent a “slight premium” to a seven per cent yield on Citi stock?
That’s actually a premium of 57 per cent. Even after the spurious tax argument, it is difficult to see how this funding can be costing much less than 9 per cent.
