Citigroup's launch of preferred securities on Wednesday is a potentially major test of market sentiment, one year after prices of bank bonds and stocks plunged to multi-year lows, analysts said.
Since those lows, major financial institutions have repaid much of the U.S. government bailout funds used to shore them up during the financial crisis, investors' risk appetite has recovered and banks have cast aside the safety net of government-backed bond issuance to sell debt in their own right.
The shares and bonds of companies bailed out by the government climbed on Tuesday and Wednesday, fueled by speculation about money-making asset sales, cheap valuations and a recovery.
Citigroup Capital XII on Wednesday launched $2 billion of 30-year fixed-rate/floating-rate trust preferred securities, said IFR, a Thomson Reuters service. The securities were expected to price at about 8.50 percent, according to IFR.
Indications were that Citi's issue would be "way oversubscribed," wrote Andrew Brenner, managing director of broker dealer and money management firm Guggenheim Securities in New York in an email note earlier on Wednesday.
The price of an existing Citi 30-year bond maturing in 2037 rose to 97.5 cents on the dollar on Wednesday, up from about 95 cents early on Tuesday, according to MarketAxess.
Because preferred securities sit between bonds and equity, they are among the riskiest instruments that bondholders can buy and are low down the capital structure. If an issuer defaults, preferred holders are among those least likely to get paid.
And because analysts view Citigroup as among the weakest of the behemoth U.S. banking groups, its plan to sell preferreds is a litmus test that could reinvigorate that sector of the market if demand proves to be solid.
"If this does happen and it is successful, it would be a huge positive for the credit markets," said William Larkin, portfolio manager with Cabot Money Management in Salem, Massachusetts.
"We haven't seen a lot of activity in the preferred marketplace, and I look at Citi and that is a weaker credit," he said. "If there is success, there could be some more issuance" of preferred securities from other financial institutions.
Larkin said he probably would not buy the Citi preferreds, although he had bought an index of preferred shares heavily laden with bank securities in mid-February as a bet the sector would gain from growing confidence in the banking system and economy.
"I am a little bit nervous about Citi," because the impact of political developments and proposed regulations on the bank are still unclear, he said.
Citigroup stock rose as much as 8.4 percent on Tuesday after a prominent fund manager said the bank's shares were underpriced. On Wednesday, its shares rose nearly 5 percent in midmorning trade.
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