September 29, 2008

Liquidity injection – $630B worldwide / $200B in US today

Raymond James to become holding company, as well.

On Monday, Citi bounced back in a shocking new role — financial savior — a status underscored by its move Monday to acquire Wachovia Corp.’s 3,300 branches.

The transaction was brokered by the federal government because it feared Wachovia would soon follow in the footsteps of Washington Mutual Inc., which failed last week.

The deal more than quadruples the size of Citi’s U.S. branch network and gives it another $500 billion in deposits, bringing Citi’s global total to $1.3 trillion.

For all of that Citi is paying precious little — $1 a share, just $2.16 billion in stock to Wachovia shareholders. The price reflects a 90% discount over where Wachovia’s shares closed on Friday. On the other hand Citi will take over $53 billion in Wachovia’s debt and will immediately write-off $30 billion in Wachovia’s mortgage-related assets upon closing the deal.

In addition, Citi is on the hook for another $12 billion of possible write-downs from Wachovia’s mortgage portfolio. Any losses beyond that, however, will be covered by the Federal Deposit Insurance Corp.

That could turn out to be a hefty burden for the government given that Wachovia’s $312 billion portfolio of mortgage-related assets is widely considered one of the sickest in banking.

The problem centers on Wachovia’s heavy exposure to ailing housing markets in Florida and California and its heavy amount of so-called Option ARM loans.

In exchange for protecting Citi from those possible future losses, the FDIC received $12 billion in preferred stock and warrants from the bank.

In addition to selling a stake to government, Citi said it is raising another $10 billion in fresh capital to cover potential losses by selling common stock. It will also cut its quarterly dividend in half to conserve cash, to 16 cents per share.

This marks the second time this year that Citi has slashed its dividend, and the latest capital-injections brings the total raised by Citi to over $70 billion this year.

The bank said it expects close fewer than 5% of its new branches, yet expects to generate cost savings of $2 billion. That number is equal to about 10% of Wachovia’s non-interest expenses last year, suggesting that there will be heavy job losses as a result of this merger.

Citi is not acquiring Wachovia’s A.G. Edwards retail brokerage unit or the Evergreen money management business. Presumably those assets will soon be put for auction or spun off to shareholders.

Commercial Loan Pricing Improves - Good Example From BBT: In case you missed it yesterday, BBT-BB&T Corp. closed a new facility with JOE-St. Joe Co. for $100 million at pricing of LIBOR+75 to LIBOR+175 depending on the level of total borrowing relative to asset values. This relationship was moved from WB-Wachovia and along the way the size of the credit line was cut in half and the pricing virtually doubled (i.e., the original terms with JOE disclosed in 2005 were $200 million at LIBOR+40 to LIBOR+100). We think this is an excellent example of how banks are able to win far better terms today than in prior years. While we hear anecdotal stories that pricing is improving on commercial credits, investors can point to this example as direct evidence.