UPDATE: Two-Notch Debt Downgrade For Citi Could Require $4.7 Billion In Extra Collateral
May 04 2012 - 6:11PM
Dow Jones News
NEW YORK (Dow Jones)--Citigroup Inc. (C), stung by a very public
setback in its recovery when regulators vetoed its share buyback,
is preparing investors for the worst when it comes to a downgrade
of its debt rating.
The nation's third largest bank by assets disclosed in a
regulatory filing Friday that the doomsday scenario, a two-notch
downgrade of its bonds by rating firms, could require about $4.7
billion in additional collateral for its holding company and its
banking subsidiary--although that is actually $700 million less
than had been predicted three months earlier.
Citi said such a downgrade could have a $2.1 billion impact on
funding costs. It didn't hint in its quarterly earnings filing with
the Securities and Exchange Commission how likely it is that it
would actually be downgraded by two notches, rather than one, and
Citi no longer discloses the impact of a one-notch downgrade.
Meanwhile, the value of Citi's Smith Barney brokerage joint
venture with Morgan Stanley (MS), which is valued at $10 billion,
is no longer identified as "impaired" as it was three months ago,
the filing said.
That could mean that, based on equity-method accounting, the
value of the venture has increased from the previous quarter, when
Citi had disclosed the value might be impaired. "The midpoint of
Citi's current range of estimated fair values for this investment
was above its carrying value as of March 31," the bank said.
Morgan Stanley said last month first-quarter revenue from the
firm's wealth-management business, the majority of which is the
joint-venture with Citi, rose 6% from the fourth, and that pretax
profit margins increased.
Moody's Investors Service said in February that it is reviewing
the ratings of 17 banks around the world that have global capital
markets operations, including Citi, because the rating firm said
"these firms face challenges that are not fully captured in their
current ratings."
A decision from Moody's is expected by the end of June.
So far, Citi and its competitors have provided details about
funding losses and collateral requirements in case rating agencies
downgrade banks one or two notches. Bank of America Corp. (BAC)
said in its quarterly filing Thursday "Moody's offered guidance
that downgrades to our ratings, if any, would likely be limited to
one notch." Moody's had previously downgraded Bank of America's
long-term senior debt rating two notches to Baa1 from A2 in
September.
A downgrade might make it more expensive for banks to fund loans
and investments because the banks would have to pay higher interest
rates, and counterparties would likely require more collateral.
Banks have been preparing investors quarterly about the increased
costs if they were to be downgraded.
Citi, however, erred on the side of caution in Friday's filing;
it stripped out the impact of a one-notch downgrade and provided
only information about a two-notch downgrade.
For banking subsidiary Citibank, additional collateral for a
one-notch downgrade could be $2.6 billion, compared to $3.2 billion
three months ago.
Moody's had placed Citi's A3 long-term rating on review for
possible downgrade last year. Fitch Ratings recently downgraded
Citi's long-term issuer credit rating one notch, to A from A-plus;
Standard & Poor's lowered Citi's issuer credit rating to
A-minus/A-2 from A/A-1.
If just Moody's were to downgrade Citi, the bank's cash
obligations and collateral requirements could increase by only
about $1.1 billion, the filing said.
In a huge surprise to management and shareholders, Citi's
efforts to buy back stock were rebuffed in March by the Federal
Reserve, which determined in its annual "stress test" that Citi
doesn't have enough capital to do so. Shareholders, meanwhile,
refused to ratify the bank's executive compensation at Citi's
annual meeting last month.
-By Matthias Rieker, Dow Jones Newswires; 212-416-2471;
matthias.rieker@dowjones.com
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