Citibank's underwriters, led by Salomon Brothers Inc., priced the initial public offering of AMBAC Inc. yesterday evening at $20 per share, according to syndicate sources.
To get the deal done, Citibank lowered the asking price from an original low of $22.50. The pricing brings the total capital raised by Citibank for the 50.3% stake to $352 million, far less than the $396 million initially envisioned.
Comparing the price to other stocks, AMBAC is a good deal. Based on 1990 net income of $105.5 million, the company's price/earnings ratio is 6.6 Municipal Bond Investors Assurance Inc.'s price/earnings ratio is more expensive at about 10. The offering also puts the company's total worth at $700 million.
Despite the low price, one syndicate source said interest in the stock "remains very limited" and noted that at least one large investment house canceled its outstanding orders after the deal was postponed June 25. At the time, underwriters said it was delayed "due to market conditions."
Sole-owner Citibank was "trying to hype the deal" yesterday, said an underwriter who asked not to be identified. "They may underprice it so it trades up after it sells.
"But there's a genuine lack of interest in the deal," he added. "The market is reluctant to work on it: they'd rather buy something else."
Citibank and AMBAC officials referred all inquiries to Salomon Brothers, and a spokeswoman there declined to comment on the sale, except to say it was back on the stock-sale calendar.
Citibank has been courting institutional investors for several months, and market participants expect such buyers to take up to 80% of the common stock. The sale involved selling 14.6 million shares of common stock to U.S. investors and 3 million shares overseas.
The $20 share price marks significantly lower expectations at Citibank. Not only is it below the original $22.50 minimum, but it pales in comparison to an offer made by US West last year.
Citibank attempted to sell the entire firm to the telecommunications company in August 1990, and US West reportedly offered $875 million, $175 million more than the $20 per share valuation. The offer was refused.
The sale of AMBAC's common stocks marks the public's even greater presence in the municipal insurance industry. Ownership of municipal bond insurers has gradually evolved from large institutions to the equity markets. Now, a majority interest in the industry's two oldest firms, AMBAC and MBIA, are owned by the public.
"This is a normal, healthy development," said Michael Djordjevich, president and chief executive officer of Capital Guaranty Insurance Co. "The industry in the beginning needed seed money from institutional investors, and $(these investors$) looked like towers of strength, not towers of jelly.
"MBIA was the first to face the music in a way," Mr. Djordjevich continued. "It's a good sound alternative to providing capital for growth. Instead of relying on one major source, you now have three -- institutional owners, internal generation, and the public sector."
The Securities and Exchange Commission requested a series of changes to the registration statement, and these resulted in three amendments, on June 10, June 17, and June 25. The completion of the pricing implies the underwriters received verbal approval to proceed from the SEC.
According to the filings, the stock sale will satisfy the regulatory concerns surrounding Citibank's ownership of AMBAC. Citibank has been using the assets of the municipal insurer to bolster its balance sheets, but not reserving for the enormous liabilities such business entails.
In February 1990, letters were released from Federal Reserve Chairman Alan Greenspan and Comptroller of the Currency Robert L. Clarke stating such selective consolidation was inappropriate accounting and was inconsistent with international bank capital adequacy standards.
The regulators' position on the capital-reserving issue forced the sale of AMBAC, according to market participants. The Federal Reserve could not impose the standards on the rest of the nation's banks if it ignored the largest, Citibank, analysts said.
"No later than the completion of the equity offerings, Citicorp will deconsolidate AMBAC for accounting and bank capital adequacy purposes," the prospectus says. "With respect to bank capital adequacy deconsolidation, Citicorp has reached understandings with the staff of the Board of Governors of the Federal Reserve System and with the Comptroller to make substantial and good faith efforts to reduce its indirect equity interest to less than 25% of the company as soon as practicable."
AMBAC backed the second-largest amount of new-issue bonds in 1990, insuring $10.15 billion for a 31% share of the insured market. The firm took the largest share of the market -- almost 34% -- in the first quarter of 1991 by insuring $2.79 billion.
