Citigroup Selling TruPS After Repaying Bailout: Credit Markets

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.

U.S. Treasury prices Washington Federal warrants

WASHINGTON, March 10 (Reuters) - The U.S. Treasury Department said on Wednesday it has priced a secondary public offering of 1.71 million government warrants to purchase common stock of Washington Federal (WFSL.O) at $9.15 per warrant.

It estimated aggregate net proceeds from the offering at about $15.4 million.

"These proceeds provide an additional return to the American taxpayer from Treasury's investment in the company beyond the dividend payments it received on the related preferred stock," the department said.

(Reporting by Doug Palmer; Editing by James Dalgleish)

GDP seen slowing, tying Fed hands on rates

March 10, 2010

(Reuters) - After a growth spurt at the end of 2009, the U.S. economy will slow in the months ahead, keeping the Federal Reserve from raising borrowing costs until the final three months of the year, a Reuters poll showed.

The survey of over 70 economists suggests U.S. gross domestic product will grow at a 2.6 percent annualized rate between January and March, less than half the pace of the fourth quarter of 2009, when it expanded at a 5.9 percent rate.

For all of 2009, the world's biggest economy contracted by 2.4 percent, but the poll predicts it will grow by 2.9 percent in 2010 on an annual basis.

With steady but subdued growth, economists expected the core consumer price index, which strips out volatile food and energy costs, to grow 1.4 percent in the first quarter of the year and to average 1.3 percent over the course of 2010 before edging up to 1.6 percent in 2011.

That suggests the Federal Reserve won't need to raise its benchmark federal funds rate, its main monetary policy tool, until the final three months of the year, a quarter later than predicted in last month's poll.

The Fed funds rate is currently set in a range of zero to 0.25 percent, and the median forecast from respondents see a rise to 0.75 percent between October and December.

"Low inflation is the key to the outlook," said Ethan Harris, head of North America economics at Bank of America Securities-Merrill Lynch. "It allows the Fed to focus exclusively on growth and keep both feet planted firmly on the accelerator."

The Fed has started to unwind some of the emergency measures it adopted during the worst days of the financial crisis. Last month, it raised the discount rate at which banks can access emergency loans.

But officials have said that broader borrowing costs would remain low for an extended period.

After hitting 0.75 percent by year end, economists expect rates to rise relatively slowly, reaching 1.5 percent by mid-2011.

Headline inflation, including food and energy costs, is likely to rise at a 2.5 percent rate in the first quarter and a 2.1 percent rate for the whole of 2010, the survey showed.

(Polling by Bangalore Polling Unit; Editing by Ruth Pitchford)

US Residential Spending Up in Fourth Quarter

Published: Tuesday, 9 Mar 2010 | 4:20 AM ET Text Size
By: Reuters

A leading indicator of U.S. residential construction spending rose in the fourth quarter from a year earlier, but business conditions remained weak as the housing downturn lingers, an architects' trade group said Tuesday.

The Home Design Survey Index of residential billings was up 12 points year over year to 32 in the fourth quarter of 2009, according to the American Institute of Architects. A score below 50 indicates a contraction in demand.

But the index slumped from the third quarter of 2009, when it hit 38. A measure of inquiries for new projects was 45 in the fourth quarter, down a point from the third quarter.

"Residential architects continue to report declining business conditions, indicating that the housing market is not yet entering a full recovery phase," the AIA said in a statement.

After a federal tax credit fueled a surge in demand, the housing market recovery has stuttered recently.

In this uncertain environment, homeowners can not be certain their homes will appreciate in value, which has made them more restrained in their spending on kitchens and bathrooms, the AIA said.

Instead of larger kitchens and more bathrooms, homeowners are placing a priority on products and features that promote energy efficiency.

"Since kitchens remain the nerve center of the home, doing more with less space is a key consideration," AIA chief economist Kermit Baker said.

Architects are aiming to integrate kitchens with family space, including areas devoted to recycling and spaces devoted to recharging laptops and cell phones.

Home Loan Demand Nudges Higher in Latest Week

Published: Wednesday, 10 Mar 2010 | 7:06 AM ET Text Size
By: Reuters

U.S. mortgage applications nudged up last week, reflecting increased demand for home purchase loans even as interest rates trekked higher, data from an industry group showed on Wednesday.

If demand for purchase loans, a tentative early indicator of home sales, continues to climb it will bode well for the hard-hit U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, for the week ended March 5, increased 0.5 percent.

The four-week moving average of mortgage applications, which smoothes the volatile weekly figures, was up 0.8 percent.

Bill Emerson, CEO of Quicken Loans in Livonia, Michigan, said the lofty level of homes either on the market for sale or about to hit the market through foreclosures and short sales are the biggest threat to the U.S. housing market.

"This inventory will pressure prices, so many people are sidelined right now, waiting for prices to fall further," he said.

The MBA's seasonally adjusted purchase index increased 5.7 percent, while its seasonally adjusted index of refinancing applications decreased 1.5 percent.

"While many people have already refinanced over the past year, there is still a huge amount of borrowers who can benefit from it," he said. Many mortgages, however, are "under water," he said.

This negative equity has been one of the biggest banes of homeowners, making many unqualified for home loan refinancing and preventing some from selling.

Borrowers in negative equity, meaning they owe more on their mortgage than their home is currently worth, are more prone to defaults and foreclosures.

Stricter lending standards, higher fees, and declining incomes have also made it tougher on borrowers. Unemployment and underemployment is another huge problem.

The Labor Department last week said the U.S. unemployment rate held steady at 9.7 percent in February.

The MBA said borrowing costs on 30-year fixed-rate mortgages, excluding fees, averaged 5.01 percent, up 0.06 percentage point from the previous week.

Interest rates were also above the year-ago level of 4.96 percent. An all-time low of 4.61 percent was set in the week ended March 27, 2009. The survey has been conducted weekly since 1990.

Mortgage rates are expected to rise when the Federal Reserve — the U.S. central bank — stops buying mortgage-related securities at the end of March.

"The Fed will likely take a step back to see if the private sector steps up and starts purchasing the bonds," Emerson said. "If they do not, mortgage rates could move significantly higher."

The lowest mortgage rates in decades and high affordability helped the hard-hit U.S. housing market find some footing in 2009 after a three-year slump. Recent data on new and existing home sales, however, point to a sector that is still struggling.

"It is a slippery slope right now in the housing market," he said.

The MBA said refinance share of mortgage activity decreased to 67.2 percent of total applications from 69.1 percent the previous week.

The adjustable-rate mortgage, or ARM, share of activity increased to 5.1 percent from 4.8 percent the previous week, the highest since November 2009.

The MBA said fixed 15-year mortgage rates averaged 4.32 percent, up from 4.27 percent the previous week. Rates on one-year ARMs increased to 6.80 percent from 6.77 percent