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Penny Stock or Not, Citigroup's Bonds Have Value

Posted by: Lauren Young on March 5, 2009

Citigroup’s stock might be worth pennies, but Citi’s short-term debt is still a good buy, according to Jason Graybill, who co-manages the fixed-income team at Carret Asset Management in New York, which manages $1.3 billion.

(Citigroup’s (C) stock traded below $1 early Thursday.)

Graybill says Citi’s short-term senior debt—bonds maturing in three years or less—is a safer bet because the government won’t let the company default. He points to the equity-but-not-debt implosions at Fannie Mae, Freddie Mac, AIG and now Citi as prime examples of cases where bondholders are still receiving interest payments and returns of principle at maturity. “With the major banks, you really don’t want to have exposure to common stock, preferred stock or subordinated debt,” Graybill says. “Those investors are in for a long, choppy ride.”

In fact, Graybill says there is an attractive opportunity for short-term senior debt at all of the major money centers. “The government has quasi-nationalized the banking system, putting good money after bad to support the financial infrastructure in this country,” he says. “As senior debt holders, we are multiple steps above the government on the capital structure ladder – a position we find attractive.”

Another manager I spoke to this afternoon thinks Citi’s stock is a buy under $1.

What do you think? Would you buy Citigroup debt—or equity—at this juncture?

Reader Comments


March 5, 2009 3:53 PM

I think this is exactly what is wrong with the bailouts. Why in the world should bondholders be receiving payments from taxpayers (that is in essence what is happening). They need to lose everything along with equity holders. Too many powerful people are close to those making the decisions and the taxpayer is making payments to bondholders as a result!! How can Pimco's Gross be making policy recommendations when he is the largest bondholder for many of these banks?

Its a disgrace.

Mark loten

March 6, 2009 4:56 AM

If bondholder did not received thier money back you will never see any one invest in bonds again. Which for sure will Destroy the economic. Hoping that not happen.

j k

March 6, 2009 5:50 PM

Daviddbc doesnt understand capitalism.Common stock is ownership of company.Bonds are a Loan to the Company in cash for a specified rate of return.We do not own the company.We act by a handshake in loaning the company capital.

j k

March 6, 2009 5:51 PM

Daviddbc doesnt understand capitalism.Common stock is ownership of company.Bonds are a Loan to the Company in cash for a specified rate of return.We do not own the company.We act by a handshake in loaning the company capital.

Bob Turner

March 6, 2009 6:35 PM

The gov't already wiped out the stock holders.

If they wipe out the bond holders too, then it would be called BANKRUPTCY!

The whole point of the bailout is so that Citi can meet its obligations!!

The Mad Hedge Fund Trader

March 6, 2009 11:06 PM

It now takes only four shares of Citigroup (C) to buy a cup of coffee at Starbucks. The stock market has hit twelve year lows only three times in the last 109 years. Remember, bottoms are made when things look terrible and are getting worse. I am not a big market timer, but this certainly qualifies as one of those times. If you assume that we are seeing the worst economic conditions this quarter since the Depression, then we are setting up for improving conditions in Q2, and the market will start to discount that. Today we hit 35% below the 200 day moving average in the S&P 500, which if you are a technical analyst, occurs about as frequently as Haley’s comet.The short interest out there is enormous, and the trade is getting too easy. Even my cleaning lady is running a leveraged short on the S&P 500. Could the short bubble be the next one to pop? Watch for another furious 10%-20% bear market rally ensue in the next few days or weeks.


March 7, 2009 11:17 AM

A default in the corporate debt would mean an end to the institution. Without the ability to issue new debt (Bonds and Commercial Paper) it could never compete in the financial world except as a small consumer bank.


March 7, 2009 3:14 PM

I see that the Senate wants the FDIC line of credit with the Treasury Department increased to a half trillion dollars. I would guess that the Fed is about to shut Citigroup down as a bank. This would involve transferring all deposits ($250,000 max) to other banks, most likely most if not all deposit accounts going to B of A. and other very large banks.

Gee Haw

March 9, 2009 10:37 PM

The assumption that the government will not let Citi fail may or MAYNOT be true.

This seems to be the question that's most interesting to potential investors, not just with Citi, but others as well.

I think right now, I'd rather have nothing to do with either bonds or equity from any company that's clearly in trouble.

So far the only winner in this stimulus/bailout stuff is the government themselves. Not private enterprise or the investor. I'm holding a lot of cash and Munis and waiting for a change of mindset that looks more forward rather than backward.

Don Burnstein

March 12, 2009 5:41 PM

The question that bothers people the most is how the Govt can throw trillions at a problem and not only not see a positive affect, but see things get worse. Much worse.

These big banks need to unwravel all their derivitives and mark to market,. If the govt is going to use taxpayer funds they have a fiduciary duty to make certain they are used with caution. I don't see that at all. We are rewarding bad behavior and penalizing the banks that didn't get involved in the over-leveraged derivative nightmare that is sucking up dollars we never had to begin with.

The solution requires a change of thinking. First , the world doesn't revolve around wall street and the big money conglomerates. When we see govt officials tripping over themselves to please these people, we know that there a whiff of corruption in the air. Looking at the campaign contributions only confirms it

If the need exists to get banks lending, new foundations and floors need to be laid before we knock down the old. That means taking the top 5 who control almost 50% of the nations assets and letting them die while buying the common stock of good banks and paying in capital so they can safely buy the bad assets out of bankruptcy court. This will allow loan modifications to be made and cram-downs while still being wildly profitable.

As the the financial sector leads us out of the bear market by having 300-500 profitable banks to invest in , it will also put a floor on the credit markets. This will give them the money to make good loans.

I would much rather see this than the ex-executives of Countrywide making a fortune buying the assets written down by TARP recipients and reselling them at huge mark-ups or servicing a heavily discounted mortgage where every payment is a pay day.

They need to be earning a $1.23 a day in jail. Taxpayers who have unwillingly been led to this slaughter need to be made whole. That's the only way to do it without losing everything.

Oh yeah: Geithner has to go with Summers. Credit Default Swaps need to be made null and void while we resurrect the Glass Steagull act.

Chew gum, and walk at the same time.
Yes we can


March 12, 2009 6:21 PM

I wholeheartedly agree with the authors and Graybill. Yes! The bond market for financial corps presents some fantastic buys at this time. These bonds MUST NOT be permitted to default, or there would be absolutely no point to the bailout in the first place. Recent news articles suggesting that bondholders should in some way "share the pain" are preposterous. Bonds are not stocks, where terms and value may be renegotiated to suit the borrower, short of an organized bankruptcy! To suggest such a severe course of action threatens to unravel the most fundamental principles of economy and only rubs salt on an open wound.

nadine brown

March 20, 2009 3:08 PM

no value.... these investors should be removed from the stock exchange they should have their names removed from the stock exchange........They are abusers and they are scum....They should never work again and they should not have children they are unfit abusers and trouble makers. They steal what they cant have.
Their cover is Violence against women they cant be cited currently because of the department of Justice but I am their victim. The department of justice people who wont cite them should be fired and they should be cited. They are low scum...beware
I will be happy the day they are all cited.....SCUM with a capital S GOOD pr for them...but they and their companies are valueless ethically and in any business sense. Their a nice mix of american and foreign Scum. Their trash...

nadine brown

March 20, 2009 3:22 PM

Who would help a worhtless scum company. I will tell you who tax cuts people who they steal from and people who die who they steal from people like me....


March 23, 2009 12:42 AM

I'm sorry Nadine that you are so upset. I see you must not have diversified your accounts during this downslide. Too bad you wern't smart and don't have anymore cash to start beefing up your portfolio again.


May 17, 2009 3:59 AM

If C Bonds fail, the bank would be bankrupt and you can kiss the whole financial system goodbye.

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