Citi's Savings

On Sept. 17, Bloomberg indicated that Citigroup plans to sell $2 billion of five-year notes that aren’t guaranteed by the Federal Deposit Insurance Corp. This senior debt may price to yield about 325 basis points more than similar-maturity Treasuries. Looking at today's levels, the YTM on 5-yr Tsy is about 2.372%, so adding 3.25 implies the yield on Citi's debt would be 5.622%.

Now, just a few days earlier, again according to Bloomberg, Citigroup issued $1.5 billion of two-year fixed-rate bonds guaranteed by FDIC. (The FDIC program guarantees debt maturing in 3 years or less, so Citi had to do without to issue 5-year bonds.) Thanks to the Government guarantee, the issue priced to yield 3 basis points less than the benchmark mid swaps rate; with the 2yr swap rate at 1.306%, that’s 1.276%. So if Citi had to pay 2-yr Tsy rate + 325bp, its cost would have been 0.992 + 3.25 = 4.242%. Its savings are thus 2.966%, or $44.5mm per year.

On the same day, Citi also issued two more notes guaranteed by FDIC: First, $2.5 billion of three-year fixed-rate notes at the mid swaps rate. The 3-yr swap rate, mid, stands at 1.9%, but if Citi had to pay at the non-guaranteed (3-yr Tsy rate plus the same spread debt, 325bp), the firm would have to pay 1.478 + 3.25 = 4.728%. So its rates savings is 2.828%. Second, it issued $1 billion of three-year floating-rate debt at the three-month London interbank offered rate, where 3-mo LIBOR today is at 0.2825%. Now, assume the funding cost are the same as for fixed-rate (at origination, that should be true): that's another saving of 2.828%, or $99mm par year for both 3-yr notes!

To sum up, this back-of-the-envelope calculation tells us that the Gov't guarantee will save Citigroup $143.5mm per year over the next 2 years, and $99mm in 3 years -- and that, just on the bonds the bank issued in September!