("AT A GLANCE: Citigroup To Give 36% Stake To US Government," published at 11:12 a.m. EST, incorrectly said in the first paragraph that Citigroup plans to convert $52.5 billion in preferred shares into preferred shares. The correct version follows.)
THE EVENT: Banking giant Citigroup Inc. (C) Friday took steps to convert $52.5 billion in preferred shares, including up to $25 billion held by the U.S. government. The move gives Citi much-needed capital but wipes out nearly three-quarters of existing shareholders' stake.
Citi's shares hit their lowest level since November 1990, pulling banking stocks lower and the broader market into the red.
WHAT IT MEANS: This is the third time since October Washington has delivered aid to Citigroup. The move is an acknowledgment that more than $50 billion in government capital and a backstop on more than $300 billion in troubled Citigroup assets haven't been enough to stop the bank's slide.
THE DETAILS: Citigroup offered to convert up to $25 billion of the government's preferred stock and nearly $27.5 billion of preferred stock in private hands. Shareholders will have to approve much of the common stock issuance.
The exchange, if fully executed, would leave the government with 36% of Citigroup's shares; existing shareholders' stake would decline to 26%.
The Treasury will convert preferred stock into common shares only if other preferred-stock holders also do so. Holders including Government of Singapore Investment Corp. and longtime shareholder and Saudi Prince Alwaleed Bin Talal have said they'll participate in the exchange.
The conversion rate for swapping the preferred stock to common shares is $3.25, a 32% premium to Thursday's closing price.
CITI EXECS SPEAK OUT: Citigroup Chief Executive Vikram Pandit and Chief Financial Officer Gary Crittenden reassured investors that the bank's capital is strong enough to get through the financial crisis. However, Crittenden said Citigroup received no word on whether the stock switch would let Citi pass the Obama administration's "stress tests" for future government aid. The "stress test" requires certain capital ratios.
OTHER CITI MOVES: Citigroup's board soon will include a majority of new independent directors. Pandit is expected to keep his job.
The company plans to record $10 billion in write-downs for the fourth quarter, boosting the full-year 2008 net loss to $27.7 billion. Citigroup also is suspending quarterly dividend payments on common shares, which already had been slashed to 1 cent.
MARKET REACTION: Shares of Citigroup recently declined 31% to $1.69. Other banking stocks were also down, notably Bank of America Corp. (BAC), off 15%.
The Dow Jones Industrial Average dropped 77 points to 7105, the S&P 500 declined 11 points to 742, and the Nasdaq Composite fell 6 points to 1386.
Citigroup's senior bonds are performing better, with estimates on the drop in risk premiums over comparable Treasury yields ranging from 15 basis points to 20 basis points. The annual cost of protecting Citi's senior bonds against default for five years, a key gauge of creditworthiness, dropped by $35,000 to $360,000.
"This places a significant layer of common equity below you, with a government who appears to be interested in keeping the institution afloat," said a corporate bond portfolio manager.
European credit derivative indexes are under renewed pressure. Credit markets reacted negatively, widening further from opening levels.
For more coverage, please see:
=Citi To Give US 36% Stake In Effort To Boost Equity
=GIC Converts Preferred Citi Stock Into Common Shares
=Eurobonds: CDS Indexes Widen Sharply After Citigroup Deal
=Bond Investors Like Citi Plan So Far But Remain Uncertain
=Citi:No Guidance From Regulators On Common Equity Ratio
(Compiled by Lisa Reynolds, Dow Jones Newswires; 201-938-5138; email@example.com)