Citibank's junk bonds? Old media vs. new

Earlier this week, Citibank raised $7.5 Billion from the Abu Dhabi Investment Authority (ADIA). To get some perspective on the deal, it seems logical to turn to the financial press.

Here's Bradley Keoun at Bloomberg.com:

Citigroup Inc., the biggest U.S. bank, is paying a "junk bond" rate to uphold Chairman Robert Rubin's pledge to preserve the company's dividend and weather this year's mortgage-market decline.

The 11 percent interest rate on $7.5 billion of convertible shares that Citigroup sold to the Abu Dhabi Investment Authority is almost double the rate it offers bond investors.

Wow! Junk bonds? Double the usual rate?

How about Marketwatch? Reporter Murray Coleman quotes Carl Salvato ("a portfolio manager at Great Companies Inc. in Tampa, Fla."):

"This deal helps their current subprime woes, but it comes at a very high price."

Citigroup has agreed to sell the coupons of its convertible bonds at an annualized 11% interest rate, Salvato said. "Market rates under normal circumstances would pay half that amount," he said. "So Citigroup had to agree to pay an interest rate similar to junk bonds in order to raise capital."

How about a wire service, which feeds the story to papers around the world? Here's Dan Wilchins and James Cordahi of Reuters:

Citi is paying a high price for the capital injection by selling mandatory convertible securities to Abu Dhabi which pay a fixed coupon of 11 percent. That is above the average yield on U.S. junk bonds, which is 9.4 percent according to Merrill Lynch data.

OK, that's pretty clear, right? Three "reputable" sources say "junk"; end of discussion.

Or not. Let's try the blogs. Here's Paul Kedrosky of Infectious Greed:

Andrew Clavell has the only lucid analysis I have seen on the Abu Dhabi [sic] cash infusion for Citi. Read it. Now.

OK, that's next: Citibank, ADIA and that pesky 11% interest rate:

Its not always that both the venerable FT and the Wall Street Journal dive into a story and miss the point so absolutely that you have to question their sanity.

Clavell's first point: the common stock already yields 7%, so that's off the table. The price range built into the future debt-to-equity conversion has a value, leaving only 1.5% per year (i.e. 150 "basis points"), which is a reasonable margin. (Read the post for the financial details.)

Since I'm elevating blogs over the MSM, I should point out that the Financial Times (FT) piece was on their Alphaville blog. In a followup piece, Paul Murphy even admits:

True to our tabloidesque instincts, FT Alphaville jumped on that word 'junk,' because it helps illustrate the story.

Er, that may be why journalists blog, but it's not why savvy financial readers choose blogs. To his credit, Murphy did (finally) bring in some outside expertise, a "convertible arb specialist":

Firstly, this is a mandatory convertible. It's NOT DEBT (obviously as it qualifies as tier 1 capital). An 11% coupon may sound high but if one considers what this structure actually is then it should become apparent that this is not high.

Again, read the post for the financial analysis.

My sentiments are aptly expressed by commenter klandnyc:

As a major financial newspaper, you should have gotten it right the first time that a comparison to junk bond wasn't the right way to look at a forward equity issuance. I think the most interesting thing about the deal is actually the media coverage of it. Junk journalism (your word, not mine) is being practiced en mass on both sides of the Atlantic. WSJ has an equally 'subprime' coverage comparing the deal to junk bond. In that sense, financial journalists aren't very different from their counterparts covering political news. It's all about sensational headlines sans nuance with very little fact checking.

Of course blogs aren't above criticism:

The picture is equally dismal in the blogger-sphere, with a few notable exception. For me, this one little deal turns out to a revealing and useful way to judge the quality and integrity of the hundred of so-called experts who blog everyday about developing financial news and deals. It differentiates those who know what they are talking about from those who don't but talk about them anyway. It's really not rocket science in this case. Anyone who was comparing the 11% yield to junk bond in this deal should start with learning about the difference between bond and equity - you know - the finance 101 stuff. Better still, they should consider writing about something else other than finance.

P.S. Emil Lee at The Motley Fool got the story right: Citi's 11% Isn't So Bad, a good indication that they've stayed true to their "new media" roots.