Citigroup Inc., the third-largest U.S. lender by assets, said a hypothetical two-level downgrade of its credit by all three ratings firms could compel the company to come up with $4.7 billion in cash.
The funds would be needed to cover collateral for derivative triggers and exchange margin requirements, the New York-based company said today in its quarterly filing with securities regulators. The sum would be $1.1 billion if only Moody’s Investors Service takes action, the bank said. The estimates were based on holdings as of March 31 and include the parent company and Citibank N.A.
Citigroup said it has about $421 billion in liquidity to meet those obligations, and could also consider “selling or financing highly liquid government securities, tailoring levels of secured lending, adjusting the size of select trading books, reducing loan originations and renewals, raising additional deposits” or borrowing from central banks.
Moody’s, which is reviewing banks and securities firms with global capital markets operations, has said it’s considering downgrades of the world’s biggest lenders, including a two-level cut for Citigroup. While ratings cuts typically raise borrowing costs and force banks to increase collateral, analysts have said the change was expected.
Bank of America Corp. may be reduced by one grade to Baa2, the second-lowest investment-grade rating, Moody’s said on Feb. 16. Competitors such as New York-based Morgan Stanley may be cut as many as three levels, Moody’s said. The ratings company wrote that credit profiles of investment banks are weakening amid worsening government finances, economic uncertainty and higher funding costs.
“Capital markets firms are confronting evolving challenges, such as more fragile funding conditions, wider credit spreads, increased regulatory burdens and more difficult operating conditions,” Moody’s said in February. “These difficulties, together with inherent vulnerabilities such as confidence-sensitivity, interconnectedness and opacity of risk, have diminished” the industry’s prospects, Moody’s said.
Moody’s has an A3 long-term rating on Citigroup’s debt, while Standard & Poor’s gives an A- grade.
Citigroup dropped 2.7 percent to $31.60 at 4:15 p.m. in New York, leaving the stock with a 20 percent gain this year.