On Tuesday, March 12, three Citigroup (C) trust preferreds began trading Ex-Div. By trading down because investors will not receive the March 15 dividend, Citigroup Capital Trust XVII 6.35% (Ticker: C-E), Citigroup Capital Trust XV 6.50% (Ticker: C-U), and Citigroup Capital Trust VII 6.95% (Ticker: C-Z) are all priced at compelling levels.
I want to highlight one risk up front before diving into the details - all three of these securities are past their call dates and can be called at any time. The call price on all three is $25.00, which is slightly below each of their March 13 closing prices.
All three securities have non-investment grade ratings.
Citigroup Capital Trust XVII 6.35% (C-E)
C-E is the newest of the bunch having been issued in February 2007. The 6.35% TruPS returns $0.396875 per quarter and is currently trading at $25.09. This gives it a current yield of 6.327% (the call date was March 15, 2012).
The 10-day average volume for C-E is 26,760 shares. This isn't the most liquid of the three TruPS mentioned, but it should provide enough liquidity for many investors.
Interest Accrual Method
Interest accrues on a 30/360 basis, meaning that the interest is calculated using twelve 30-day months (for a 360-day year). This can be found on Page 16 of the Prospectus.
The position is trading at a premium of $0.09. With 90 accrual days in a quarter returning $0.396875, each day $0.0044097 accrues in interest. It will take 21 days to recapture this premium.
Citigroup Capital Trust XV 6.50% (C-U)
C-U was issued in September 2006 and has a coupon of 6.50%, which pays $0.40625 per quarter. The closing price on March 13 was $25.07, which is a current yield of 6.482%. The position has been callable since September 2011.
The 10-day average volume for C-U is 59,465 shares. This should provide enough liquidity for most investors.
Interest Accrual Method
Interest accrues on a 30/360 basis, meaning that the interest is calculated using twelve 30-day months (for a 360-day year). This can be found on Page 17 of the Prospectus.
The position is trading at a premium of $0.07. With 90 accrual days in a quarter returning $0.40625, each day $0.0044643 accrues in interest. It will take 16 days to recapture this premium.
Citigroup Capital Trust VII 6.95% (C-Z)
C-Z IPOed in September 2001 and has a coupon of 6.95% ($0.434375 per share per quarter). It has been callable since September 2006 and has a current yield of 6.889%.
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The 10-day average volume for C-U is 57,426 shares. This should provide enough liquidity for most investors.
Interest Accrual Method
Interest accrues on a 30/360 basis, meaning that the interest is calculated using twelve 30-day months (for a 360-day year). This can be found on Page 13 of the Prospectus.
The position is trading at a premium of $0.22. With 90 accrual days in a quarter returning $0.434375, each day $0.0047215 accrues in interest. It will take 47 days to recapture this premium.
Citi's Capital Plan acknowledges that certain trust preferred securities will begin a gradual 4-year phase out from Tier 1 Capital beginning in the first quarter of 2013. Citi requested a $1.2 billion common stock buyback as part of the capital plan and is maintaining its common stock dividend of $0.01 per share.
Given that Citi is not doing much to its common stock and there are changes coming for the capital treatment of their TruPS, it's not hard to imagine that Citi will begin calling certain TruPS to avoid the negative impact to their capital ratios. This is nothing new, though, as they have been slowly calling some of their trust preferreds:
All three of the trust preferred securities that were called in 2012 had higher coupons then C-E, C-U, and C-Z.
The notice period (the difference between the notice date and the call date) for the three called TruPS in 2012 was 33 days for C-G, 34 days for C-F, and 40 days for C-J.
Outstanding Trust Preferreds
Citi has a number of outstanding trust preferreds with coupons ranging from 7.875% to 6.000%.
The three TruPS mentioned fall in the middle of the coupon range for the Citi's outstanding TruPS.
As these are all Trust Preferreds, none of the positions are eligible for the 15% Tax treatment.
These three Trust Preferreds - C-E, C-U, and C-Z - offer investors the chance to pick up some yield at attractive levels on Citigroup. For investors who have patiently waited for the $0.01 dividend on the common stock to increase, it's a good way to pick up a little bit of a return while continuing to wait.
There is a chance that any of these Trust Preferreds will be called, that's why it's important to look at how long it will take you to recover any premium paid. When these preferreds are redeemed, the investor will be paid the face amount ($25) plus any accrued interest through the redemption date.
With the lowest coupon, C-E has the lowest chance of being called. The position has the least amount of liquidity, but it will only take 21 days to accrue any premium paid. With the average notice period of 36 days for the three TruPS called in 2012, there's a good chance accrued interest will exceed the premium paid, even if the notification goes out tomorrow.
C-U has the smallest premium, middle coupon, and highest liquidity. With the coupon higher than C-E, it does have a higher probability of being called, however it will only take 16 days of accrued interest to exceed the $0.07 premium.
With the highest coupon and highest premium, C-Z is not for the faint of heart. It has the third-highest coupon of Citi's outstanding TruPS, and it will take 47 days to accrue the $0.22 premium. 47 days is longer than any of the notification periods for the 2012 called TruPS, so purchasing this position for the higher current yield means you are taking the stance that Citi will not announce the redemption of any trust preferreds until a couple of weeks have passed (if they even announce redemptions at all).
Disclosure: I am long C.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of the author. Investors are strongly encouraged to do their own research and discuss potential investments with an investment professional.