Citi has reached an agreement with the U.S. government and its regulators to repay $20 billion of Troubled Asset Relief Program (TARP) trust preferred securities and to terminate the loss-sharing agreement with the government.
‘We are pleased to be able to repay the U.S. government's trust preferred securities and to terminate the loss-sharing agreement,’ says Vikram Pandit, Citi's CEO. ‘We owe the American taxpayers a debt of gratitude and recognize our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need.’
Citi says it will immediately issue $20.5 billion of capital and debt, which comprise $17 billion of common stock, with an over-allotment option of $2.55 billion; and $3.5 billion of tangible equity units (consisting of approximately $2.8 billion of prepaid common stock purchase contracts (recorded as equity) and approximately $0.7 billion of subordinated notes (recorded as debt)).
In connection with Citi's offering, the Treasury Department will sell up to $5 billion of the common stock it holds in a concurrent secondary offering. After the secondary offering, the Treasury is subject to a 45-day ‘lock-up’ period. The Treasury has also announced that it plans to sell the remainder of its shares over the next six to 12 months.
As agreed with the U.S. government and its regulators, following the completion of the $17 billion common stock offering and the $3.5 billion offering of tangible equity units, Citi will repay $20 billion of TARP trust preferred securities.
As a result of the repayment of the TARP trust preferred securities and the termination of the loss-sharing agreement, Citi expects a net reduction in annual interest expense of approximately $1.7 billion and approximately $0.5 billion in lower annual amortization expense associated with the loss-sharing agreement.
Once Citi repays the $20 billion of TARP trust preferred securities and upon termination of the loss-sharing agreement, it will no longer be deemed to be a beneficiary of ‘exceptional financial assistance’ under TARP beginning in 2010.
‘As I have stated many times over the past year, we planned to exit TARP only when we were convinced that it was prudent to do so,'' Pandit says.