Citigroup Reviving Bond Underwriting Couldn’t Save Pandit
Citigroup Inc. (C), which last week ousted Chief Executive Officer Vikram Pandit over management missteps, is staging a comeback in corporate-bond underwriting as it helps overseas companies borrow in the U.S.
Citigroup, the top underwriter of bond sales worldwide in the decade before the 2008 financial crisis, managed 6.1 percent of sales this year through yesterday, up from 5.7 percent in 2011, according to data compiled by Bloomberg that excludes self-led deals. The New York-based lender climbed to second in rankings from fourth last year, closing in on JPMorgan Chase & Co. (JPM) and relegating Bank of America Corp. to third.
From Asia to the U.S., issuance of corporate bonds totals $3.2 trillion this year, second only to 2009’s pace, as central banks led by the Federal Reserve cut interest rates to record lows and investors seek riskier assets. Citigroup’s global reach has helped it win underwriting business from companies including Heineken NV (HEIA) and Nippon Life Insurance Co. looking to tap U.S. markets amid unprecedented demand for dollar-denominated assets.
Citigroup views “underwriting, particularly in an environment where yields are still dropping, as a lower risk and more profitable activity,” Anthony Valeri, market strategist at LPL Financial in San Diego, said in a telephone interview. “It probably seems like an easier decision given the Fed’s support of the bond market and the demand to refinance.”
Citigroup is reclaiming some of the dominance it lost during the financial crisis four years ago, when the U.S. government injected $45 billion and taxpayers guaranteed more than $300 billion of assets to prevent its failure. After ceding the top rankings to JPMorgan and Bank of America, the bank is reemerging after shoring up capital and bolstering its balance sheet with deposits approaching $1 trillion.
“It has now got enough capital to more aggressively go after the market,” Richard Bove, an analyst at Rochdale Securities LLC in Lutz, Florida, said in a telephone interview. “It is now able to go back to its customers and say, ‘We can do this underwriting for you and do it more cheaply.’”
Elsewhere in credit markets, swaps-market participants will have a grace period before trades are required to be cleared, settling confusion over a rule that will begin early next year, said Commodity Futures Trading Commission Chairman Gary Gensler. Clear Channel Communications Inc. received the consent of its lenders to amend the agreement to its credit facilities.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to bet on creditworthiness, jumped the most in four weeks, climbing 3.7 basis points to 97.7 basis points as of 11:58 a.m. in New York, according to prices compiled by Bloomberg.
The Markit iTraxx Europe Index, tied to the debt of 125 investment-grade companies, rose 5.4 to 128.3, the biggest increase since Sept. 26.
Both indexes typically rise as investor confidence deteriorates and fall as it improves. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, increased 0.48 basis point to 10 basis points. The gauge, which narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities, touched 8 basis points on Oct. 17, the lowest level in Bloomberg data back to 1988.
Firms dealing in $648 trillion of outstanding swaps contracts expected that trading during a phase-in period wouldn’t need to be processed by central clearinghouses, according to an Oct. 5 e-mail sent to clients by Davis Polk & Wardwell LLP, which represents the Securities Industry and Financial Markets Association. While the firms were wrong, misreading one sentence in 17,000 words of regulation, Gensler said today the idea was always to allow a grace period.
“I know what I believed when I voted on it, it was prospective,” he told reporters today at Sifma’s annual conference in New York, saying that the market needs time to adjust to the “paradigm shift” of bringing U.S. oversight to unregulated interest-rate, credit-default and other swaps and to move them into clearinghouses. “This was an easy one for me,” Gensler said.
The Clear Channel amendments will allow the San Antonio- based radio and billboard company to exchange term loans for as much as $5 billion in new debt securities, to prepay portions of its term loans, to allow for below par repurchases of term loans and to repay junior debt, as well as other debt management measures, according to a statement today distributed by Business Wire.
The amendment will become effective with the closing of an offer to exchange a portion of the company’s term loans, according to the statement.
Bonds of Citigroup are the most actively traded dollar- denominated corporate securities by dealers today, with 160 trades of $1 million or more as of 11:54 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The bank sold $1.5 billion of 5.95 percent perpetual preferred notes yesterday that switch to a floating rate after 10 years, Bloomberg data show. The securities rose 1.5 cents to 101.5 cents on the dollar, according to Trace.
Citigroup helped manage $167 billion of global sales this year, up from $146.5 billion in 2011, Bloomberg data show. In the U.S., the bank moved up one level this year to become the second-largest underwriter of investment-grade debt with 11.3 percent market share, up from 9.9 percent in 2011. In U.S. high- yield bonds, it remains the fifth-largest with 8.2 percent, down from 8.9 percent last year.
One of the lender’s biggest gains has been in managing sales in the U.S. market for foreign companies as borrowing costs in the nation plunge to all-time lows and Europe’s fiscal crisis increases demand for the dollar’s relative safety.
“The U.S. dollar market continues to be viewed as the most reliable source of liquidity globally, particularly as local markets become more constrained,” Peter Aherne, Citigroup’s head of North America investment-grade capital markets, syndicate and new products in New York, said in a telephone interview.
Citigroup has led 11.7 percent of dollar-denominated investment-grade issuance this year by non-U.S. corporate borrowers, Bloomberg data show. That’s the most of any bank and up from a fifth-place ranking last year with a 9.3 percent share.
The bank “has a large corporate client base and it’s just natural that it should be a big player in debt underwriting,” Richard Staite, an analyst at Atlantic Equities LLP in London, said in a telephone interview.
Citigroup served earlier this month as one of the managers on a $3.25 billion, four-part sale by Amsterdam-based Heineken, the world’s third-biggest beer-maker, to fund the acquisition of Asia Pacific Breweries Ltd. It helped run a $2 billion sale by Nippon Life, Japan’s biggest life insurer, on Oct. 11 of 30-year subordinated debt.
Citigroup directors replaced Pandit with Michael Corbat on Oct. 16 after concluding his mismanagement of operations caused setbacks with regulators and cost credibility with investors, a person with knowledge of the discussions said. Board members ousted Pandit even as the bank increased total deposits to 944.6 billion, the highest level in Bloomberg data going back to 1996.
“In the last 12 months they’ve been able to come back pretty nicely,” Bove said. “You want to watch liquidity, capital and their spread-to-Treasuries in borrowing. You put all those things together and you got a company which is able to compete meaningfully for this business.”
The extra yield investors demand on average to own the bank’s bonds instead of Treasuries has plunged to 160 basis points through yesterday from 402 basis points at the end of 2011 and compares with an average 167 among its U.S. peers, Bank of America Merrill Lynch index data show.
The cost to protect against losses on Citigroup debt using credit-default swaps has dropped 47 percent this year and reached a more than 15-month low of 139 basis points on Oct. 17, prices compiled by Bloomberg show.
The bank posted a surprise third-quarter profit last week, reporting third-quarter net income of $468 million, or 15 cents a share, according to an Oct. 15 statement. Including one-time items, analysts estimated Citigroup would post a loss of $777 million.
Sales of global corporate bonds are the busiest on record after $3.3 trillion during the same period in 2009, Bloomberg data show. Issuance by overseas borrowers in U.S. markets is at record levels, with $494.1 billion issued this year compared with $418.7 billion in the same period last year.
“We aspire to be a prominent player, a top three player, in each of our underwriting business,” Aherne said.
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