- California announces state unemployment rises to 10.1%
- Citi put on outlook negative by S&P.
The affirmation reflects our belief that, with completion of the proposed recapitalization, there will be a significant boost to Citi's capital adequacy. Through the exchange of up to $52.5 billion of hybrid capital issues of varying types--held by the U.S. government and investors--the loss-absorbing capacity of Citi's capital base would be strengthened, with capital quality and adjusted common equity levels improving markedly. Moreover, the drain on liquidity and capital from ongoing dividend payments would drop significantly.Sphere: Related Content Print this post
Yet, the outlook revision reflects our concern that if, contrary to our current expectations, Citi's turnaround strategies (which entail significant execution risk) are unsuccessful, debtholders could eventually be required to participate in further government-led restructuring actions. The need for the current recapitalization-–which will massively dilute existing shareholders and likely make the U.S. government Citi's largest shareholder-–points up the magnitude of the company's past losses and the difficult prospects it faces as it seeks to revitalize its business franchise and return to profitability. We believe Citi will face a tough credit cycle in the next two years, which will likely result in weak and volatile earnings. Given the uncertain earnings outlook, we cannot rule out the possibility that further government support may prove necessary. Still, the ratings on Citi continue to reflect a combination of extraordinary external support from the U.S. government for highly systemically important financial institutions and the company's own credit characteristics. Specifically, the long-term counterparty credit rating reflects a four-notch uplift from Citi's stand-alone credit profile.
The outlook is negative. Particularly with the completion of the just-announced recapitalization plan, we assume the company's capital will be adequate, even if credit losses during 2009-2010 should be somewhat more severe than now assumed. However, we see some potential for earnings to be substantially worse than we now expect, making further government assistance a potential development. This raises the possibility that debtholders could then be required to participate in those further restructuring actions.