February 4, 2013 / 10:25 PM / in 5 years

CORRECTED-Citigroup to repay US Treasury via $894 mln bond issue

(Corrects lead to clarify that the $894 mln is last part of debt Citigroup owes Treasury)

By Danielle Robinson

NEW YORK, Feb 4 (IFR) - Citigroup Inc on Monday began the process of repaying the last portion of the debt it owes the US Treasury, by announcing an $894 million 9.5-year fixed-rate subordinated bond issue.

The Citigroup subordinated notes, which carry a 4.05% coupon and are currently held by the Treasury, will be sold in the bond market on Tuesday.

Although Citigroup still owes the Federal Deposit Insurance Corp about $2.225 billion, it will sell the subordinated notes to general investors on behalf of the US Treasury and give the latter the proceeds.

The deal worked like this.

Citigroup gave the US Treasury $894 million of subordinated notes on Monday in exchange for the $800 million of remaining trust preferred securities (TruPS) that the Treasury owned as part of the bailout.

Citigroup exchanged the old TruPS for the new subordinated notes because it makes more sense for the bank to have more junior debt on its balance sheet than TruPS, which have lost their capital securities status under Dodd Frank.

The $94 million extra that Citigroup is giving Treasury is a premium that equates with the value of the old TruPS in today’s market.

At a coupon of 4.05%, Citi has managed to reduce the amount it usually has to pay to issue subordinated debt versus senior unsecured obligations at the parent level.

Normally its senior/subordinated spread differential is about 65-70 basis points. If the deal is priced at par, then the 4.05% represents a 55bp differential.

The tighter pricing is because investors are keen to buy subordinated rather than senior unsecured bank debt, now that the FDIC and the Fed have started working on new liquidation rules that will make all debt at the holdco level bail-inable, regardless of seniority. (Reporting by Danielle Robinson; Editing by Ciara Linnane)

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