Citicorp's already battered stock price took a further pounding on Tuesday.
The shares fell 75 cents, or 5%, to $14.75 on the company's announcements Monday that Richard S. Braddock had unexpectedly resigned as president and that third-quarter earnings would be lower than analysts had expected.
About four million shares changed hands, making it the day's second most active issue on the New York Stock Exchange.
Effect on Preferred
The latest bad news comes as Citicorp is set to begin marketing a $650 million issue of convertible preferred stock. Money managers say the latest developments may force Citicorp to sweeten the terms of the deal.
The company and Morgan Stanley & Co., which is managing the offering, plan to begin presentations to investors on Thursday in New York.
Morgan Stanley expects the issue to be priced late next week. Pricing could come directly after the final sales meeting in San Francisco on Oct. 15.
Citicorp common shares have been in a tailspin since Aug. 7, when it filed the convertible issue with the Securities and Exchange Commission. The common shares have fallen 25% from $19.625 on that date.
The securities are known as Percs, for preferred equity redemption cumulative stock. They pay a fixed dividend and automatically convert to common stock after three years. They differ from simple convertible preferred in that a Percs share converts into fewer common shares as the common rises in price. Citicorp would be the first bank to issue this type of security.
Initially, fears of dilution related to the Percs offering caused the plunge in share price. However, the fall accelerated in early September, when a scathing report by examiners - criticizing the company's home mortgage operations - was leaked to the
More Discouraging News
Citicorp announced Monday that third-quarter earnings would be $80 million to $100 million, half of what Wall Street expected. Nonperforming assets are expected to rise as well, disappointing many analysts. More optimistic money managers, such as Fidelity Investments, said the core earnings were within expectations.
The departure of Mr. Braddock, more than the disappointing third-quarter earnings, is expected to renew concerns of potential buyers of the 42 million convertible shares.
"Anytime you have an unexpected change in leadership it hurts a company's image," said Richard Hurckes, a portfolio manager with Loomis & Sayles, an investment management company in Chicago. "If Wall Street imagined Braddock was the future leader of the company, now they have to stand back and say: What is the shape that Citicorp is looking for to fit into the puzzle?"
Clinging to Top 50
Citicorp can't afford snags in the Percs deal. By almost all measures of capital strength, Citicorp ranks last among the top 50 banks, according to a recent report from Montgomery Securities. For example, common equity-to-assets was 3.59% at midyear, well under the 5.1% median for a money-center bank.
In fact, investment bankers widely consider the Percs deal a prelude to a future $1 billion offering of common stock. Presumably, that issue would have to wait until Citicorp restores its dividend on common shares. In any case, if the Percs offering is successful, Citicorp's quarterly dividend expenses will increase significantly.
The banking company paid $50 million in dividends for preferred stock last quarter. If the Percs issue carries an 8% dividend - the middle range of the price talk - that will add another $13 million dividend expense each quarter.
Upping the Ante
Morgan Stanley has been telling money managers that each Percs share will carry a dividend yield of 7.75% to 8.25%.
Given the uncertainty caused by Mr. Braddock's departure, money managers may try to extract more favorable terms. One money manager, who asked not to be named, said the deal may not go unless the yield is boosted to 8.5%.
"But if you don't have faith in the company and the underlying common, it wouldn't matter if you get another 50 basis points on the yield," said Richard L. Pike, vice president of Chancellor Capital Management and Trust, a New York money-management