Wednesday, April 29, 2009

the first option is to accelerate plans to sell unwanted businesses

TO BE NOTED: From the FT:

Citigroup scrambles to raise capital

By Francesco Guerrera in New York

Published: April 28 2009 19:20 | Last updated: April 29 2009 00:29

Citigroup has told US regulators it could fill the capital shortfall identified in the government’s “stress test” by selling large businesses, asking more investors to convert their preferred shares into common stock and reducing its balance sheet.

Executives are trying to persuade the government Citi does not need more capital beyond its recent plans to bolster its battered balance sheet and cut costs.

However, with days to go before the results of the tests are announced, Citi, which has been bailed out three times by the authorities, is looking for ways to avoid receiving more government help if the authorities insist on an increase in capital.

Bank of America, another lender whose test has highlighted the need for funds, is in talks with regulators over its needs and the possibility of converting the government’s preferred shares into common stock, bankers said. Analysts have estimated BofA could require up to $70bn in extra capital.

Citi executives argue that divestitures, such as the planned $5.2bn sale of Japan’s Nikko Cordial to Sumitomo Mitsui, the possible expansion of an existing conversion offer, and cost-cutting would ensure it has enough capital to withstand the crisis.

People close to the situation said Citi could sell several units in Citi Holdings, the division that holds its non-core activities. Citi executives do not rule out shedding businesses deemed as core but argue that, if the company has to raise capital, the first option is to accelerate plans to sell unwanted businesses.

Citi has also looked at adding to its planned conversion of $52bn of preferred shares held by the government and other investors by including trust-preferred shares, although that idea was losing ground last night. Some insiders argue it could be difficult to persuade holders of such shares – a hybrid of debt and equity – to exchange them for common stock because they rank as debt and pay interest.

People close to the situation said both Citi and BofA were contesting some of the conclusions made in the stress tests. Citi executives, led by finance chief Ned Kelly, are believed to have told regulators the estimates for losses on credit cards – based on rising unemployment – are too high.

Citi is also asking regulators to take into account the capital boost it will receive from the expected sale of a majority stake in its brokerage unit Smith Barney to Morgan Stanley as well as the likely disposal of Nikko.

That deal is expected to generate an accounting loss, because Citi’s acquisition price for the business is higher than the likely sale price but it would still result in a cash boost for Citi.

People close to the situation cautioned that discussions between Citi, Treasury and the Federal Reserve were fluid and details of the plans could change ahead of the release of the results of the stress tests next week.

Some Citi executives believe the government may still have to convert more of its preferred shares into common stock, ­raising its holding above the 36 per cent it is due to take following the latest bail-out in February.

Citi shares closed down 5.9 per cent. BofA shares closed down 8.6 per cent at $8.15.

BofA declined to comment. Citi said its capital base was “strong”.

Additional reporting by Greg Farrell in Charlotte

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