Citigroup completes $58B stock swap

Citigroup Inc. has completed its $58 billion stock offering, a move that strengthens the struggling bank's balance sheet and makes way for the U.S. government to take ownership of a 34 percent stake.

Citigroup Inc. has completed its $58 billion stock offering, a move that strengthens the struggling bank’s balance sheet and makes way for the U.S. government to take ownership of a 34 percent stake.

Citi said late Sunday that nearly all public holders of its preferred and trust preferred securities agreed to swap their shares for about 5.83 billion shares of common stock. The New York-based bank on Thursday had completed a $12.5 billion exchange that swapped preferred securities held by private debt holders for interim securities and warrants that will eventually be converted into common stock.

The government carried out a separate exchange Thursday, swapping $12.5 billion of its preferred shares in the bank for securities and warrants as well, and will again exchange another $12.5 billion shortly.

“The successful completion of the exchange offers marks a significant milestone for Citi,” said Vikram Pandit, Citgroup CEO, in a statement Sunday. “Citi will have approximately $100 billion of Tangible Common Equity (TCE) and a Tier 1 Common ratio of approximately 9 percent based on our June 30 results. That unquestioned financial strength combined with our strategy to return Citi to its core franchise of institutional and consumer businesses spanning an unmatched global footprint are driving Citi’s return to sustained profitability and growth.”

Citigroup said in late February it wanted to offer investors the option of exchanging preferred stock into common stock as a way to boost its capital reserves. The government agreed to convert about $25 billion of its $45 billion preferred investment in the bank to common stock, which will give it a 34 percent stake in the bank.

Citigroup has been one of the most troubled banks in the financial crisis. It lost billions of dollars on the risky mortgage-backed securities that plunged in value, setting off the credit crisis last fall.

In May, the government determined Citigroup would need to raise an additional $5.5 billion as a buffer against future losses. Citigroup said it would convert an extra $5.5 billion of preferred shares into common stock to meet the capital shortfall.

The exchange should give Citigroup a better mix of capital to withstand additional loan losses and further weakening in the economy. By turning preferred shares into common stock, Citigroup also no longer has to pay out dividends on the preferred shares, thus helping improve its cash flow.

The $58 billion in exchanges lifts Citi’s Tier 1 Common by approximately $64 billion and its tangible common equity by approximately $60 billion.

Tier 1 Common and the Tier 1 Common Ratio are useful because they are measures used by banking regulators to evaluate a company’s financial condition and capital strength. TCE, as defined by Citigroup, represents common equity minus goodwill and intangible assets, and after deducting related deferred tax liabilities. Tier 1 Common includes Tier 1 Capital minus qualified perpetual preferred stock, qualifying minority stakes in subsidiaries and qualifying trust preferred securities.