Credit to the information on Citigroup convertibles goes to Andrew Bary of Barron's.
Citigroup is offering a plan in which they can convert expensive preferred/convertible noteholders into common equity at a discount to market price. The idea is simple, it lowers interest costs, boosts capital ratios, and lets some preferred/convertible security holders to convert their depressed prices in those securities into equity at a higher price.
However, at market value, convertibles are being valued as if Citigroup was worth 2.46 a share Vs. the 3.20 a share value the market is currently giving! Before we go ahead and trade on these to earn a 30% return in the matter of a month or so lets put out some risk factors:
1-conversion was suppose to happen in April and is now being scheduled for May
2-a lot of noise seems to be coming from the "stress-test" results coming on or around May 4th
3-potential of plan not going through is high if Citigroup fails "stress test"
4-the pretentiousness of the exchange offer if it does not pass is amazing
To clarify on #4, check the end of this document: http://www.citigroup.com/citi/press/2009/090227a.pdf This means that if this exchange offer is not passed, holders of these securities will be rewarded by increased interest payments and participation in a dilutive process that will create almost 15% more shares outstanding. Why would you do that unless you expected bankruptcy?
I feel like this is Citigroup trying to show it has a last ace up its sleeve as well as muscle their own shareholders.... but all it really means is that Citigroup is simply a goner without anymore help. Furthermore, should the vote not pass, it allocates even MORE capital to preferred/convertible holders. Somebody fire the management team for not looking out for shareholder interests!
Sharholders being strong armed by management? What kind of violent capitalism is this!
Anyways, should they pass the stress test and get a vote of confidence from the Treasury, it can be said with certainty that this exchange offer will be passed in its current form. At that time we will revisit the arbitrage opportunity.