The long-awaited U.S. government effort to bolster its bailout of Citigroup Inc. was announced Friday, which will see the firm issue common stock in exchange for preferred securities to boost its tangible common equity in an effort to restore investor confidence.

Citi will offer to exchange common stock for up to US$27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of US$3.25 a share. The U.S. government will match this exchange up to a maximum of US$25 billion face value of its preferred stock at the same conversion price. This transaction could increase the TCE of the company from the fourth quarter level of US$29.7 billion to as much as US$81 billion, it said.

Based on the maximum eligible conversion, the U.S. government would own approximately 36% of Citi’s outstanding common stock and existing shareholders would own approximately 26% of the outstanding shares. All investors’ new stakes will be determined following the exchange.

In response to announcement, Fitch Ratings said the transaction “should provide needed stability and support to Citigroup”. However, it added that on a standalone basis, Citi continues to be exposed to deteriorating macro-economic conditions and significant balance sheet stress. It downgraded the bank, citing greater relative credit risk and Citi’s heavy reliance on continued U.S. government support.

Fitch said it believes Citi’s asset quality will continue to deteriorate considerably in 2009. “Global economic difficulties will cause the inflow of new problems ranging from U.S. and international consumer exposures to large corporate exposures. Consequently, loan loss provisions and chargeoffs will escalate from already high levels in 2008,” it added.

Additionally, Citi announced that it recorded a pre-tax goodwill impairment charge of approximately US$9.6 billion (US$8.7 billion after-tax) in the fourth quarter of 2008. Citi had previously announced that it was continuing to review its goodwill to determine whether a goodwill impairment had occurred, and this charge is the result of that review and testing. The goodwill impairment charge was recorded in North America Consumer Banking, Latin America Consumer Banking, and EMEA Consumer Banking, and resulted in a write-off of the entire amount of goodwill allocated to those reporting units. In addition, Citi recorded a US$374 million pre-tax charge (US$242 million after-tax) to reflect further impairment evident in the intangible asset related to Nikko Asset Management.

The primary cause for both the goodwill and the intangible asset impairments mentioned above was the rapid deterioration in the financial markets, as well as in the global economic outlook generally, particularly during the period beginning mid-November through year-end 2008, it said.

As a result of these additional charges, the firm’s net loss from continuing operations for 2008 was US$32.1 billion and net loss was US$27.7 billion.

IE