Citigroup Bonds Offer Good Value

Bank issued credits were as dependable as sunshine in Santa Fe until Lehman Brothers went down, and investors in Lehman debt got soaked, not to mention that a full-blown credit crisis was unleashed.

Authorities have since bent over backwards providing all sorts of cheap funding to banks to prevent another bank collapse — which is why Citicorp bonds maturing in October 2011 (issued in October 1996) with a current yield of 7.2% are appealing. The bonds are rated A by Fitch ratings and offer a hefty 6%-plus yield pickup over 2-year treasury bonds.

Citigroup (C) has been identified as capital deficient according to recently completed government stress-tests and plans to convert $58-billion in preferred shares into common equity, $25-billion of which is government money.

Investors get massively diluted, by more than 75%, but for bondholders it's a victory. They benefit from a stronger balance sheet with tangible common equity relative to tangible assets rising to 5%.

Citigroup will continue to suffer loan losses on its $2-trillion of assets, but the government has made itself clear that it cannot afford to allow Citigroup to fail. As the worst of the credit crisis fades into history, these bonds look to offer investors good value.

Comments

[Larry House:]

The same could be said for the bonds of almost any financial institution that is currently backstopped by the government. Go where the government goes. I purchased bonds in several, including AXP, MS, GS, BAC several months ago. I also purchased LEH bonds early last year when they looked fine. However, the government decided not to back LEH. You win some, you lose some.

Jul 01 03:43 PM