Citicorp's plan to raise roughly $650 million in a hybrid form of convertible preferred stock is being lauded as innovative by investors and analysts. However, many said it is still not enough to keep the company out of the capital doldrums.
Indeed, some predicted that the nation's biggest bank will be back in the market with a straight equity offering within the next year.
"This is just one of many steps in raising capital," said Brent Erensel, an analyst at UBS Securities, who thinks Citicorp could return to market before January.
The $650 million that Citicorp hopes to raise "is only a relatively small portion of what it will eventually need," agreed Raphael Soifer, an analyst at Brown Brothers Harriman. To play in the same arena as other money-center banks and big foreign banks, he said, Citicorp will have to raise $5 billion in equity capital.
However, some people think Citicorp has come up with a crafty plan.
Fixed Dividend Attractive
The company said Friday that it will issue 32.5 million preferred equity redemption cumulative stock, or Percs, that will pay dividends but could be less dilutive than a straight equity offering.
Citicorp's common stock does not pay any dividend.
If the underwriters, led by Morgan Stanley & Co., scare up enough interest to exercise their overallotment option, Citicorp would raise about $750 million, said one analyst who asked for anonymity.
"If they don't reinstate the dividend, and continue to make money, they'll be a long way to raising the capital they need." the analyst said. "I'm not sure another offering is a necessity under these circumstances."
A Limited Upside
Like traditional convertible preferred stock, Percs pay a fixed dividend to investors. But unlike them, Percs convert into fewer common shares as the common stock price rises. So the potential to capture upside growth is limited.
Here's how it works.
If Citicorp issues the new security with a call price of $27 and the common stock is at $27 or less on the conversion date, each Percs will be converted into one common share.
If the common stock is at $40, though, each Perc will be converted into 27/40 of a common share. With a conventional convertible preferred, the holder would get a common share regardless of the common stock price on the conversion date.
Though no other bank has issued Percs, they have been used by other companies that were struggling through hard times, including Westinghouse Inc., RJR Nabisco Holdings, and Sears Roebuck & Co.
Protected from Dilution
The Percs structure is relatively good news for current investors, who fear dilution.
But it's unclear whether new investors will go for the curb on the stock's growth. Moreover, the dividend on Percs, which were designed by Morgan Stanley, sometimes pays less than on a conventional issue.
Past Perc offerings have carried dividends of about 8% and conversion prices between 30% and 45% over the company's common stock price at the time of the offering.
It's not surprising then that some investors have been cool to Percs. "We have not been big buyers of Percs," said Anthony Cope, a senior vice president at Wellington Management Co., which is major investor in Citicorp.
By issuing preferred stock rather than common, however, Citicorp may succeed in attracting a different kind of institutional investor.
Many pension funds and some other big share buyers are limited to buying stocks that pay dividends.
Douglas Pratt, a portfolio manager at Invesco Trust Co., said almost a fourth of the $8 billion his firm manages fits the dividend-only category.
"A lot of investors will not or cannot buy a common stock that doesn't pay a dividend," said Christopher Gootkind, a vice president at Scudder, Stevens & Clark. "This way, you can get growth-and-income funds."
Citicorp would not comment on its motives, or on pricing of the preferred, because the issue is in registration with the Securities and Exchange Commission.
If the offering proceeds as planned, Citicorp will add 0.25 to 0.30 basis points to its 4.25% Tier 1 capital ratio, analysts estimated. That would still be short of the 5% targeted by chairman John S. Reed, but above the regulatory minimum.
One investor, who asked for anonymity, said Citicorp almost undoubtedly will be back to shore up the capital levels even further.
"It's not just a matter of meeting minimum capital ratios anymore," he said. "You need excess to keep the regulators happy."
Limited Core Application
Under regulatory rules, only a small percentage of Tier 1 capital can be made up of preferred.
That means that not all of the $650 million issue would count as core capital.
However, if the bank succeeds in its plan to become more profitable through retained earnings and asset sales - it earned money in the second quarter for the first time in five quarters - more of the preferred could be used for calculating Tier 1 levels.
Citicorp's stock closed at $19 Monday, down 62.5 cents.