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Debt, CFA, Portfolio manager, preferred stocks
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Citigroup (NYSE:C) launched a new fixed to float perpetual preferred stock on September 12th. The details of the offering (from the preliminary prospectus) are:

Issuer

Citigroup Inc.

Issue Series J
Dividend Rate 7.125%
Structure Fixed/Floating rate Noncumulative Perpetual Preferred
Optional Redemption Date September 30, 2023
Deal Size $900,000,000
Ratings B1/BB/BB
Ticker
Use of Proceeds General Corporate Purposes
Floating Rate After 9/30/2023, the shares will become floating rate and accrue at 3m LIBOR +

The series has a regulatory capital call as well. This is defined as more than an insubstantial risk that the shares will not be treated as tier 1 capital for regulatory reasons.

In order to determine if there is value, first we have to look at the preferred stock options available to us in the Citigroup complex:


(Click to enlarge)

As the table shows, an investor can out-yield the new security only if he/she is willing to pay a premium and accept a lower yield-to-call. Personally, I can't see either of these being redeemed, but most investors - myself included - shy away from preferred stock trading above par. With this in mind, I believe that relative to the available Citigroup preferreds, the new issue has value, or is "cheap."

If we have established that the issue is cheap relative to other Citigroup options, we must now look at the issue versus other peers, in this case using Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Zions Bancorporation (NASDAQ:ZION) and US Bancorp (NYSE:USB).


(Click to enlarge)

As the table above shows, Bank of America (the Merrill issues) are cheap (on a yield basis) to the Citigroup issue and trade right around par. Both banks have wood to chop, but I believe Bank of America has more headline and execution risk and therefore more volatility. That said, they can both be utilized in an income portfolio although they will be correlated (as will all rate-based industries).

Bottom Line: I like the new Citigroup issue and intend to position it within my income focused portfolios. The bank has been making progress in rightsizing and reducing their risk profile and the preferred should do well (change in rates aside, which will affect all income securities) from an idiosyncratic (non-systemic) standpoint.

Source: Citigroup - 7%+ At Par