An unusual Citigroup preferred stock issue seemed to be too good to be true, with a yield around 10% for the past several years when most big-bank preferreds were offering 6% to 7%.
The bounty could be coming to an end. The price of the $2.2 billion Citigroup preferred issue has fallen recently amid investor concerns the bank will redeem it.
The Citigroup Capital XIII 7.875% Trust Preferred Securities, which are traded on the NYSE under the ticker symbol C Pr N, ended Thursday at $26.25 a share, down 1.4% in the session and at a new 52-week low. The shares traded around $29 a month ago and at $30 earlier this year.
The shares were trading at $26.375 on Friday morning, up 0.5% on the session.
The face value of the Citigroup preferred stock is $25 a share, like those on many preferred issues, and matures in 2040. The company can redeem the shares at $25. The current yield is now about 10% with the rate adjusting quarterly at 6.63 percentage points above SOFR, the short-term rate benchmark now around 3.65%.
Investors were willing to pay a premium price above $25 a share for the Citigroup preferred to get the high yield, figuring the bank wouldn't redeem it.
The Citi issue is a special type of preferred known as trust preferred securities, or Trups. The Citi Trups were issued to the federal government in the wake of the financial crisis, and Treasury then sold them into the public markets in 2010.
Citigroup declined to comment on its intentions, but investors may be focusing on a comment from CFO Gonzalo Luchetti on the earnings conference call in July that the bank would look at "structural funding opportunities."
That's admittedly a little vague, but investors sense Citigroup could soon move to redeem the preferred at $25, and potentially replace it with lower-cost financing. This would result in losses to investors who paid more than $25 a share.
Why has Citigroup left this preferred stock issue outstanding for so long and given investors such a high yield? As Barron's noted in April 2024 article, Citi would have to take an accounting loss on a redemption.
Due to a quirk in accounting rules, the preferred is carried on Citi's balance sheet for about $1.6 billion, not the face value of $2.2 billion. A redemption at the face value of $25 would result in a loss of about $600 million, Barron's estimates. Citi also gets favorable capital treatment for the preferred.
"As we've stated in the past, due to this grandfathered security's carrying value on the balance sheet, it's more attractive economically to leave it outstanding rather than to call it at this time," Citi said in a statement included in our 2024 article. "We continue to assess this on an ongoing basis."
Citi also gets some tax benefits from the trust preferred because it is technically debt, and the dividend costs are deductible, unlike regular preferred, which is a senior form of equity and whose dividends are paid with after-tax earnings.
Citi pays interest on subordinated debt issued to the trust, called Citi Capital XIII, which then passes on the payments to investors. This benefits Citi since the interest payments are tax deductible, unlike preferred stock dividends.
Investors get no tax break on the Citi trust preferred dividends, unlike those on most regular preferreds, which are taxed preferentially at a 20% federal rate like dividends on common stock. Preferred stock is form of equity.
The current effective cost of the trust preferred is closer to 7.5%, based on Citi's tax rate of about 25%. That's above a 6.25% rate on Citi preferred. But Citigroup likely could offer debt at 5% to 6% to pay off the preferred or use cash on hand.
This Citigroup preferred has offered an outsize yield, but like many good things, it may not last.
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