March 10 (Bloomberg) -- Citigroup Inc., seeking capital after repaying bailout funds to the Treasury, is selling trust preferred securities as rising investor demand drives borrowing costs to near the lowest in almost five years.
The bank plans to issue as much as $2 billion of the securities, known as TruPS, as soon as today, according to a person familiar with the offering who declined to be identified because terms aren’t set. The 30-year fixed-to-floating rate securities may initially yield about 8.875 percent, another person said.
Citigroup, 27 percent owned by the U.S. government, is issuing the debt after borrowers sold $13.9 billion of U.S. corporate bonds yesterday, the busiest day in more than a month. The New York-based bank’s offering shows that liquidity is improving, which will help the economy, said Daniel Fuss, vice chairman at Loomis Sayles & Co. in Boston.
“It’s wonderful news for Citigroup and also shows markets are functioning very well,” said Fuss, whose Loomis Sayles Bond Fund is in the 97th percentile among peers this year, according to data compiled by Bloomberg.
Citigroup is selling the TruPS following a $7.6 billion loss in the fourth quarter after it repaid $20 billion of the securities issued under the Treasury’s Troubled Asset Relief Program, set up in late 2008 to support financial firms and markets.
“It’s a capital structure need,” said David Hendler, the head of U.S. financial services research at CreditSights Inc. in New York. “It’s not as dilutive like common equity issuance and they’ve already done a ton of that.”
Novartis, MGM Mirage
Yields on corporate bonds are near five-year lows, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. They fell to 4.015 percent on Feb. 26, the lowest since May 31, 2005, and were 4.023 percent as of March 9. Average spreads over Treasuries fell to 1.6 percentage points, matching the lowest this year.
Elsewhere in credit markets, Novartis AG, Switzerland’s second-biggest drugmaker, and MGM Mirage, the largest casino owner on the Las Vegas strip, led the busiest day for U.S. corporate bond sales since Feb. 4, Bloomberg data show. Novartis sold $5 billion of 3-, 5- and 10-year senior notes for its acquisition of Alcon Inc., the world’s largest eye-care company. MGM Mirage issued $845 million of 10-year bonds to repay loans.
American International Group Inc.bondholders reaped at least $3.2 billion after agreeing to sell its two largest non- U.S. life insurance divisions for $51 billion, Bloomberg data show.
Sales in Europe
In Europe yesterday, Goldman Sachs Group Inc. led 10 sales totaling 7 billion euros ($9.5 billion), the most this year, Bloomberg data show. New York-based Goldman Sachs, the most profitable securities firm in Wall Street history, priced 1.25 billion euros of seven-year debt in its first benchmark deal in the currency in five months.
Asian companies are selling record amounts of dollar- denominated bonds amid the lowest relative borrowing costs in more than two years and demand from international investors.
BOC Hong Kong (Holdings) Ltd., the Hong Kong unit of Bank of China Ltd., and Chinese developer Evergrande Real Estate Group Ltd. led Asia-Pacific borrowers selling $38.4 billion of dollar debt this year, the fastest start on record, according to data compiled by Bloomberg. Sales climbed 35 percent from $28.4 billion in the same period last year, when they slumped 22 percent after the seizure in credit markets.
Nakheel PJSC bonds, part of Dubai World’s planned $26 billion debt restructuring, climbed the most in two months yesterday after JPMorgan Chase & Co. said creditors may get paid face value. The developer’s $750 million sukuk, or Islamic bond, added 5 cents, the most since Jan. 6, to 56.25 cents on the dollar, prices compiled by Bloomberg show.
Low Interest Rates
Federal Reserve Bank of Chicago President Charles Evans said low U.S. interest rates are likely to be needed “for some time” as high unemployment lingers and inflation stays below his target.
“With the unemployment rate at 9.7 percent and inflation significantly under my benchmark for price stability, there is no conflict between our policy goals,” Evans said in the text of a speech in Arlington, Virginia. Weakness in the job market, including long-term unemployment, means that “this accommodation will likely be appropriate for some time,” he said.
In the loan market, Anheuser-Busch InBev NV, the biggest beer maker, will cut at least $90 million from annual interest costs by refinancing $17.2 billion of debt it took when the company was formed in 2008.
Maker of Budweiser
Lenders to the maker of Budweiser set interest at 117.5 basis points over benchmark rates on three-year term loans, and 97.5 basis points on a five-year revolving credit line, according to two people with direct knowledge of the deal. That compares with a margin of 175 basis points the company is paying on its existing debt.
The cost of insuring against default on European and Asian corporate bonds fell today. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings fell 5 basis points to 407 basis points, according to JPMorgan Chase & Co. The Markit iTraxx Japan index dropped 2 basis points to 121 basis points in Tokyo, according to BNP Paribas SA prices.
The cost of protecting against U.S. corporate defaults rose yesterday. The Markit CDX North America Investment-Grade Index, linked to credit-default swaps on 125 companies, increased 1.2 basis point to 83.7 basis points, according to CMA DataVision. The Markit iTraxx Europe index of swaps on 125 companies with investment-grade ratings was little changed at 74 basis points.
‘Screaming Bargain’
Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting against default on $10 million of debt for five years.
AIG said March 1 it was selling AIA Group Ltd. to Prudential Plc for $35.5 billion. A week later, MetLife Inc. agreed to buy American Life Insurance Co. for $15.5 billion.
AIG’s $78 billion of bonds surged to 18-month highs since Feb. 26, according to Bloomberg data. The bailed out New York- based firm’s debt is the best performer this month through yesterday on Bank of America Merrill Lynch indexes.
Citigroup is the sole bookrunner on its sale of TruPS, the company said in a prospectus filed with the U.S. Securities and Exchange Commission. The filing didn’t specify the amount of the sale.
Citigroup shares rose 26 cents, or 7.3 percent, to $3.82 in New York Stock Exchange composite trading yesterday, the biggest rise since August, Bloomberg data show.
“People are looking at Citi more as a stable to hopefully gradually growing entity,” Hendler said. The stock is a “screaming bargain,” CreditSights analysts wrote in a March 8 report.
The bank raised more than $80 billion of new capital last year, increasing the number of shares outstanding during the last three years sixfold to almost 30 billion. Its book value per share -- its net worth, divided by total shares outstanding -- tumbled to $5.35 as of Dec. 31 from $24.18 at the end of 2006.
Citigroup’s $2.35 billion of 8.3 percent fixed-to-floating bonds due in 2057 rose 1.4 cent to 96.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The hybrid debt has more than tripled in price in the last year from 30.5 cents, Trace data show.
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