The Value of Trust Preferred Shares
By: Dr. Charles Lieberman
Date: 2/27/2009
The government's latest recapitalization effort with Citigroup is now public. The U.S. government will convert its preferred shares into common, as will some of the largest holders of the preferred shares. Citi will also suspend dividend payments on its remaining preferred shares and common shares. The preferred conversion will rebuild tangible capital from $29.7 billion to $81 billion. The conversion price is $3.25, well above the current price of the common shares.
In fact, the government's PR is terrible. They are converting their own preferred shares into common and forcing or encouraging other owners to convert. In doing this, they are placing the government and these other large investors behind all other preferred and bond investors, making the remaining preferreds and bonds far more secure investments. This totally reverses Paulson's approach of punishing shareholders and placing the government ahead of private sector investors. However, common shareholders still seem to fear that the government will wipe them out, despite Bernanke's statements twice this week that the government had neither a need, nor a desire to do so. However, there seems to be little reason for the authorities to nationalize Citi in the wake of its conversion of preferred into common.
There is also some confusion over the treatment of the preferred shares, because regular preferred and trust preferred are not the same and are treated differently. The trust preferred shares, which we own, are backed by subordinated debt and will continue to pay the quarterly dividend. Citi's G preferred, the trust preferred that we own in investor accounts, has risen strongly in price off yesterday's close. It has also become a safer security, given the additional capital that now sits behind it. When we bought these shares, we chose trust preferred shares for clients over regular preferred to guard against the possibility of such an event. Citi's bonds, which we do not own, should also be perceived as stronger credits now.
Many of the largest owners of Citi shares have agreed to the exchange of their preferred shares for common, including the Government of Singapore, Prince Alaweed Bin Talal, Capital Research, and others. Citi is offering to exchange as much as $27.5 billion in preferred into common from the private sector, in addition to the $25 billion to be exchanged by the U.S. government. Download this article in PDF Format
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