Investors' hunger for high yields in a low-rate market enabled Citicorp to successfully sell $1 billion in convertible preferred stock this week.
Citicorp originally planned to sell $650 million of the issue. But the 8.25% annual dividend yield of the securities, combined with what investors said was a more honest approach to discussing the banking company's problems, sparked a buying spree that prompted an increase in the offering's size.
The securities are known as Percs, for preferred equity redemption cumulative stock. Unlike other convertible preferred stock, Percs give investors a limited bonus if a company's common stock rises.
"Can you think of anything that gives you a yield north of 8%?" asked Robert Bissell, a senior vice president in charge of the trust investment portfolio at Wells Fargo & Co., giving his reason for buying Percs.
"There are a lot of yield-hungry investors, including us," said Harlan Sonderling, an analyst at the Putnam Group, a Boston mutual fund company that bought Percs. "We have a lot of cash that needs to be invested for yield."
No Boost for Citicorp Leaders
Mr. Sonderling echoed the views of other Percs buyers when he said the decision to invest in the securities was not a vote of confidence in Citicorp management.
In fact, neither Wells nor Putnam owns or intends to buy Citicorp common stock even at the current low price of about $15 a share. The common shares do not pay a dividend.
Skeptical money managers had pegged the deal as a hard sell, given Citicorp's near-weekly announcements of bad news since August when the issue was registered with the Securities and Exchange Commission.
Supersalesman Reed
But more than one money manager described chairman John Reed as a "hell of a good salesman."
And he had to be one.
In early September, regulatory worries about problems in Citicorp's mortgage operations came to light. In addition, the company began presentations on the Percs to investors just as it was announcing lower-than expected third-quarter earnings and the resignation of president Richard Braddock.
Mr. Bissell of Wells Fargo, who said he eschews bank turn-around stories, was also influenced by Mr. Reed's frankness.
In his sales pitches, Mr. Reed was forthcoming about the bank's progress in raising equity and cutting expenses, money managers said. He was equally forthcoming about the company's asset troubles, including his plans to bring in a high-level turnaround expert to help guide the bank.
The candor was appreciated by investors who said that, previously, the bank's executives would not publicly acknowledge problems.
"John Reed told a good story," said Bruce Herring, a portfolio manager at Fidelity Investments, Citicorp's biggest institutional shareholder. Fidelity was another Percs buyer.
"I think a lot of people would have liked to own common stock, but it doesn't pay a dividend," Mr. Herring said. "This is the first piece of paper that Citicorp offered that had equity characteristics as well as a yield."
Strengthening Capital
The 68 million convertible shares will dilute the earnings per share of Citicorp. But the company, with the lowest capital ratios of any major banking company, can't afford to avoid dilution. It had to raise capital. The Percs issued will cost the bank $82.7 million in annual dividends.
"No one likes dilution," said Mr. Herring, "but the deal puts Citicorp's balance-sheet issues behind them."
When Citicorp's Percs convert in 1995, they will add 50 basis points to the Tier 1 capital ratio.
Generally, convertible issues counts as Tier 1 capital. But regulators allow only 25% of Tier 1 capital to consist of preferred stock, and Citicorp is at the threshold.
Analyst, however, said they consider the Percs to be Tier 1 capital now, which would put the third-quarter Tier 1 ratio at 4.75%.
Buying Time to Offer Common
The bank's goal is to raise Tier 1 capital to 6.5% by the end of 1993, helping it to qualify as a well-capitalized bank under new regulatory guidelines.
Because the size of the Percs deal was increased, analysts said it may have bought Citicorp additional time before it must come to market with an offer of common stock.
Citicorp's Percs convert to common shares in three years, at a conversion price that won't exceed $20.28 per share. By terms of the securities, that means Percs holders won't benefit further it Citi's common stock price rises above $20.28. Over three years, that's nearly a 65% return on investment based on the $14.75 per share paid for the stock, analysts said.
Some money managers, including a number of Citicorp's biggest investors, believe the common stock will appreciate more than that, so they thumbed their noses at the Percs issue.
Popular with Institutions
"If you think there is going to be appreciation in the common, you buy the common," said Mr. Sonderling of the Putnam Group.
Morgan Stanley & Co., the lead underwriter, declined to talk about the Percs. But money managers said that 90% of the shares were bought by institutional investors. Most Percs are usually bought by retail investors.
