Citigroup Returns to Bond Market It Sat Out for Two Years

  • Bank issues credit-card bonds after focusing on corporate debt
  • Other banks may follow as they meet requirements of Fed rule

Has the 30 Year Bond Rally Reached Its End?

Citigroup Inc. borrowed this week in a bond market that it has avoided for the last two years as new regulations pressed it to focus on issuing more expensive debt.

The bank sold around $2.5 billion of bonds backed by customers’ credit-card balances on Tuesday, a person familiar with the matter said. Last year the bank cut back on issuing credit-card asset-backeds while selling longer-term, unsecured debt to meet a Federal Reserve regulatory requirement, according to a presentation to bond investors. Selling more securitized debt could cut its borrowing costs and boost its lending profit.

Citigroup is returning to credit-card bonds after having taken care of most of its debt-raising requirements under the rule, known as Total Loss-Absorbing Capacity, according to a separate person with knowledge of the matter, who asked not to be identified because he was not authorized to speak to the media. Other banks could follow suit, said Arnold Kakuda, a bank bond analyst with Bloomberg Intelligence.

Banks have been selling more longer-term debt to meet the Fed’s TLAC requirements in recent years, and their remaining required issuance is abating. Their increased issuance is just one example of how regulators are influencing a wide range of bank business and operations after the 2008 financial crisis that Wall Street helped create.

“The Fed’s got a tremendous amount of power over the big banks now,” said Jeff Harte, a bank stock analyst at Sandler O’Neill in Chicago.

Rob Julavits, a spokesman for New York-based Citigroup, declined to comment.

Almost Done

TLAC is designed to make banks safer by ensuring they fund themselves with enough types of securities that can absorb losses in a crisis, including equity and long-term senior unsecured debt issued by the holding company. Citigroup needs to issue around another $2 billion of long-term bonds to meet the rules, according to estimates from BI.

That figure is down from about $7 billion at the end of the third quarter and around $15 billion at the end of last year, according to presentations from the company. Issuing more securitizations would have slowed the pace of the bank meeting those hurdles.

Banks could broadly choose to fund their businesses with more asset-backed securities because deposit funding is growing more expensive as the Fed raises rates, said Sandler O’Neill’s Harte. Citigroup issued $11 billion of credit-card bonds in each of 2013 and 2014.

Selling securitized debt is often cheaper than borrowing in the corporate bond market, because asset-backed debt is safer and can therefore pay less interest. Citigroup’s three-year credit-card ABS were sold on Tuesday with a yield of around 1.8 percent. Citigroup’s most recently issued three-year unsecured notes traded that same day with a yield of around 2.1 percent, according to data compiled by Bloomberg.

Overall issuance for credit-card bonds is far below the levels seen before the financial crisis. In 2015, around $24 billion of the securities were sold, according to trade group the Securities Industry and Financial Markets Association. In 2008, that figure was over $117 billion. Banks account for most issuance of the bonds.

Credit-card balances in the U.S. grew by $18 billion in the third quarter to $747 billion, according to the Federal Reserve Bank of New York. Delinquencies are near historic lows.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE