Citigroup Increases Stock Offering to $4.5 Billion

April 30 (Bloomberg) — Citigroup Inc., under pressure to bolster capital depleted by mounting losses, sold $4.5 billion of stock, 50 percent more than it planned.

“…upon the earth distress of nations, with perplexity…”
óLuke 21:25

Citigroup fell as much as 4 percent in New York trading after the biggest U.S. bank said in a statement that it priced 178.1 million shares at $25.27 each, a discount to yesterday’s closing price of $26.32. The sale represents about 3 percent of the bank’s shares outstanding as of March 31.

Chief Executive Officer Vikram Pandit asked investors for new funds after the bank had already raised more than $37 billion during the past five months, more than any financial- services company. Meredith Whitney, an analyst at Oppenheimer & Co. who was one of the first to predict the extent of Citigroup’s losses, said the latest stock offering may not be the last.

“The fact that the company raised such a small amount of capital at this time confounds us,” Whitney wrote in a note to investors yesterday. “Citi needs to raise an additional $10-$15 billion or sell several hundreds of billions worth of assets in order to truly shore up its capital position.”

Citigroup fell 74 cents to $25.58 as of 12:02 p.m. in New York Stock Exchange composite trading, after reaching $25.25. The stock has fallen 52 percent in the past year.

Rating Concern

The world’s biggest banks, grappling with more than $300 billion of losses on mortgages, bonds and loans, have sought new capital to stave off credit-rating downgrades that might jeopardize client relationships and access to financing. Companies usually try to avoid forced stock sales because they dilute the earnings power of current shareholders.

“They need the additional capital,” said Ben Wallace, an analyst at Grimes & Co. in Westborough, Massachusetts, which manages $800 million including Citigroup shares. “The dilution factor is a secondary concern these days.”

The bank’s previous capital-raising efforts included the sale of equity to investment funds controlled by foreign governments in Abu Dhabi, Singapore and Kuwait. Last week Citigroup sold $6 billion of preferred shares, a bond-like security that isn’t dilutive to common shareholders, after it reported a $5.1 billion first-quarter loss and cut 9,000 jobs.

In total, the bank’s capital raising has diluted current shareholders by about 20 percent, Wallace estimated.

The size of today’s sale was increased in response to “strong demand from a broad base of investors,” Chief Financial Officer Gary Crittenden said in the statement.

Tier 1

The new equity, when combined with the preferred stock sold last week, will raise Citigroup’s so-called Tier 1 capital ratio to about 8.6 percent, the company said. The ratio, used to gauge a bank’s ability to withstand loan losses, was 7.7 percent at the end of March. Regulators consider banks with a Tier 1 ratio of 6 percent “well capitalized.”

Citigroup sets its Tier 1 target at 7.5 percent, to give itself a margin of error and help avoid a downgrade of debt ratings. When the company reported its first-quarter loss, Standard & Poor’s said it was reviewing the bank’s credit rating, currently AA-, for a possible downgrade. Rising consumer-loan delinquencies may force the bank to set aside higher reserves to cover bad debt, Standard & Poor’s said.

In Citi’s trading division, “there will still be some more writedowns but probably not as extreme as previous quarters,” Grimes’s Wallace said. “But Citi is also a commercial bank and the loans are getting bad as the economy is impacted.”

Dividend Risk

Selling shares may help Citigroup avoid cutting the bank’s shareholder dividend for the second time this year, Wallace said. The company slashed the dividend by 41 percent in January, its first reduction since the early 1990s, to save about $4.4 billion a year. At the current rate, Citigroup still pays out more than $6 billion a year.

JPMorgan Chase & Co., the third-biggest U.S. bank by assets, and Merrill Lynch & Co., the third-largest securities firm, also have raised capital in recent weeks by selling preferred shares.

Pandit, 51, and Crittenden, 54, said earlier this year that the bank might avoid the need to raise more capital. Crittenden said in January that the company had “stress-tested” assumptions under “multiple recessionary scenarios.” Then the bank posted its first-quarter loss and Crittenden was asked on an April 18 conference call with analysts if the bank might seek more capital. “You can never say never,” he said.

`Challenging Time’

Pandit said at the company’s annual meeting last week in New York that “2008 remains a challenging time for financial markets and, in general, for our entire industry.”

Citigroup has recorded more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. The world’s biggest banks have raised more than $170 billion in capital to replenish their coffers.

“We were hoping they wouldn’t have to go to the equity markets like this,” said William Fitzpatrick, an analyst at Optique Capital Management in Racine, Wisconsin, which held more than 550,000 Citigroup shares at the end of last year. “This was extremely disappointing.”

Copyright © In The Days