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Abu Dhabi's Cash Infusion: Does It Save Citi?

Abu Dhabi's $7.5 billion capital injection intoCiti--that's 4.9% of the company--contains a stunning figure: a mandatory convertible that pays 11% yield (Citi currently has a 7.1% dividend yield)! That, as many have observed, is above the average yield for junk bonds, currently about 9%. The price ranges from $31.83 to $37.24. The units convert to shares in 2010-2011.

The good news is that Citi was able to raise equity, a vote of confidence in the company. The bad news is they had to pay a yield well above junk bonds to get it done.

Does this mean Citi's problems are over? No. Consider:

1) This is part of Citi's much needed effort to shore up its capital base. How to do that? You can: a) raise equity (what they have just done), but you may also need to: b) sell assets, and c) cut the dividend. Citi confirmed it has sold certain non-strategic assets over the past several months, but there will likely be more sales, and no word yet on the dividend.

2) Earnings are likely to continue to deteriorate--this investment does not change that. CIBC noted this morning: "CDO write-downs are "first inning" issues, but we believe losses associated with C's high LTV [loan to value] mortgage exposures will mount at an alarming rate over the next several quarters."

Elsewhere a trio of retailers kept their fourth quarter guidance intact:

--American Eagle reported earnings in line with expectations, management seemed please with Thanksgiving weekend sales. Guidance of $0.67-$0.70 a tad below consensus of $0.70.

--Talbots reported a loss that was not as severe as expected, and reaffirmed a fourth quarter loss. These are losses, but at least not deteriorating.

--Staplesbeat expectations, and left Q4 guidance unchanged; up 8% pre-open.

And homebuilder Pulte is lifting builders this morning by reaffirming their fourth quarter guidance; up 7% pre-open.

Is Crude Finally Cracking?
I wrote yesterdaythat commodity traders were puzzled that base metal stocks had been cracking but that crude showed no signs of weakness at all. We might be seeing the crude markets cracking--finally--with crude oil down 3.1% this morning, the biggest day-over-day decline in two weeks. The catalyst is likely a belief that OPEC will announce a production increase at their December 5th meeting. This is a fig leaf, of course; Saudi Arabia is the only country that has the ability to significantly ramp up production.


Questions? Comments? tradertalk@cnbc.com

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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