Credit default swaps on Citigroup rallied today as the U.S. governments third round of efforts to strengthen the faltering banks capital base lowered the risk of default.
Citigroup continues to improve in creditland, now (spreads are) tighter by almost 80 basis points since last week, said Dave Klein, senior analyst at consultancy Credit Derivatives Research.
The plan should provide needed stability and support to Citigroup, analysts at Fitch Ratings said in a research note today where they affirmed Citigroups long-term and short-term Issuer Default Ratings at A+, with a stable outlook. Their decision was based on the magnitude of continued support measures from the U.S. government due to Citis systemic importance, they wrote.
The Treasury today said in a statement it would convert up to the $25 billion of preferred stock it holds in Citigroup through the Troubled Asset Relief Program into common stocks. The Treasury would become Citigroups single largest shareholder, owning an estimated 36% of the bank. Prospects of such dilution drove Citigroup shares down 40% to $1.47, an 18-year low, in late afternoon trading.
The conversion deal will work only if other preferred shareholders agree to it, including Prince Alwaleed Bin Talal of Saudi Arabia and the Government of Singapore Investment Corp.