Treasury to Auction Citi Warrants - Analyst Blog

The U.S. Treasury has announced its plan to auction 465.1 million of the Citigroup Inc.'s (C">C) warrants it holds. The warrants were received as part of the bailout provided to the troubled bank during the financial crisis.

The warrant holders have the option to buy Citi common stock at a fixed price within a specified time period. Lenders also have the right to place bids to buy back the warrants.

The auction, which begins today would witness Treasury auctioning approximately 255 million warrants classified as “A" warrants with a minimum bid price of 60 cents per warrant and around 210 million of “B" warrants with a minimum bid price of 15 cents per warrant.

The buyers of the warrants would have the right to purchase an equal number of Citi shares at a fixed price – $10.61 for the A warrants and $17.85 for the B warrants with an expiry date of December 31, 2018, and October 28, 2018, respectively.

However, both the prices are significantly higher than the current price at which Citi is trading. Yesterday Citi's closing price was $4.86. The price remained in the band of $3.11 and $5.15 in the last 52 weeks.

The pricing would take place through a modified Dutch auction. Deutsche Bank Securities Inc. of Deutsche Bank AG (DB">DB) is the sole book-running manager and Cabrera Capital Markets, LLC and Loop Capital Markets, LLC are the co-managers for the offerings.

Proceeds from the warrants auction will be added to the $12 billion that the Treasury has already booked from its investments in Citi. The Treasury invested a total of $45 billion in Citigroup pursuant to the Troubled Asset Relief Program (and made a $5 billion commitment under the Asset Guarantee Program that was never funded).

Following the final sale of Citi's stake in December last year, the Treasury recouped all of the $45 billion plus approximately $12 billion in profits, consisting of dividends, interest and gains on the sale of Citi common stock and other securities.

Earlier in 2009 and 2010, the Treasury also raked in decent profits from its warrant auctions in other biggies such as Bank of America Corp. (BAC">BAC) and JPMorgan Chase & Co. (JPM">JPM). The warrants were received by the Treasury as part of the investments offered to the troubled institutions for bailing them out of the crisis.

The offloading of stake and warrants by the Treasury is a positive for Citi as it reduces the government overhang on the stock. Additionally, it is viewed as a sign of recovery of the overall economy and inspires our confidence in the financial system.

The $700 billion Troubled Asset Relief Program, which was initiated three years ago to rescue the nation's financial industry, remains a success story. The lower-than-anticipated cost to taxpayers is encouraging.

While most of the major financial institutions have repaid their TARP loans in full, a lot of money is still expected to be recovered. Hence, the ultimate success of TARP is yet to be seen. However, the estimated overall cost has been continuously falling.

Citi shares maintain a Zacks #3 Rank, which translates into a short-term Hold recommendation.

 
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