Citigroup Sells $2 Billion of Debt Without Government Backing

Citigroup Inc. sold $2 billion of 8.5 percent notes in its first benchmark offering without a U.S. government guarantee since August, according data compiled by Bloomberg.

The 10-year notes priced at 98.26 cents on the dollar to yield 8.8 percent, or 562.5 basis points more than similar- maturity Treasuries, Bloomberg data show. A basis point is 0.01 percentage point. Citigroup underwrote the offering.

Sales of financial-company debt without U.S. backing signal the market is healing, said Mark Kiesel, managing director and global head of corporate bond portfolio management at Pacific Investment Management Co. Banks began using the Federal Deposit Insurance Corp.’s Temporary Liquidity Guarantee Program in November, when their credit was frozen after the collapse of Lehman Brothers Holdings Inc.

“What’s been encouraging with the banks is they’ve been able to raise equity and come to the unsecured bond market,” Kiesel, who oversees more than $200 billion in corporate bonds, said in a telephone interview from Newport Beach, California. “That’s a really huge deal. These companies were basically funded through the FDIC program. The fact that they can get the private capital markets to lend them money -- that’s a sea change.”

Citigroup last offered a benchmark, dollar-denominated issue without government backing in August, selling $3 billion of 6.5 percent notes due 2013, according to data compiled by Bloomberg. A benchmark sale is typically at least $500 million.

FDIC Program

Citigroup’s $3 billion of 6.125 percent notes due in 2018 traded yesterday at a yield of 7.85 percent, or 475 basis points more than Treasuries, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Financial companies have issued $240 billion of bonds under the FDIC program since they began using it on Nov. 25, according to data compiled by Bloomberg. The guarantee opened a new avenue for funding amid a credit seizure that had shut financial companies out of debt markets since September.

The New York-based bank’s new debt is rated A3, the seventh level of investment grade, by Moody’s Investors Service and A, one step higher, by Standard & Poor’s.

Investors are more willing to buy financial company debt without a guarantee as the government has shown it will not allow the big banks to fail, said Michael Donelan, who oversees $3 billion of bonds at Ryan Labs Inc., a money management and research firm in New York.

“We all know now who the survivors are deemed to be,” Donelan said in a telephone interview. “We think finance is definitely cheap enough to own here.”

Credit Ranking

S&P affirmed Citigroup’s A/A-1 counterparty credit ranking and removed the ratings from CreditWatch, the New York-based unit of McGraw-Hill Cos. said in a statement on May 8.

The bank’s counterparty rating reflects “the firm’s high systemic importance and the likelihood that additional support would be extended by the U.S. government if needed,” S&P said.

The extra yield, or spread, investors demand to own investment-grade corporate bonds instead of similar-maturity Treasuries narrowed to 443 basis points as of yesterday, from a record 656 basis points in December, according to Merrill Lynch & Co.’s U.S. Corporate Master index.

Citigroup is the latest bank to offer bonds without a government guarantee, following sales including Morgan Stanley’s issue of $2 billion of 10-year notes on May 7 and Bank of America Corp.’s $3 billion issue of 5-year debt on May 8, Bloomberg data show.

“Citigroup’s fundamental backdrop is a lot shakier, at the moment, than some of the other guys, like Goldman Sachs or Morgan Stanley,” Donelan said. “They’re heavily exposed to some of the problems right now, real estate predominantly.”

Morgan Stanley’s 7.3 percent notes priced at a spread of 400 basis points, and Bank of America’s 7.375 percent securities paid a 537.5 spread.