Citi Trust Preferred Stocks: Can Your Shares Be Prematurely Called?

Citigroup’s trust preferred stocks (TRUPS) are probably the most widely held preferred stocks on the planet. The Big Bank has thirteen TRUPS issues current trading so if you have been investing in preferred stocks for any length of time it is very likely that your portfolio includes some from Citi.

Given that many Citi TRUPS shareholders count on the dividend income provided by these, and other similar, securities there is some concern that Citi could issue a “premature call” of one or more of its TRUPS issues unexpectedly leaving those shareholders without that income.

This is exactly what happened to those holding FTB-C (Fifth Third) last May; that premature call caught many off guard (see the May 20, 2011 post below titled “Fifth Third’s Premature Call of FTB-C: Are Others Next?”).

With the two important exceptions explained here, holders of Citi TRUPS do not need to worry about this. Here’s why.

The Wall Street Reform Act, signed into law on July 21, 2010, removed the primary reason that our Big Banks (assets greater than $15 billion) issued TRUPS to begin with. Beginning on January 1, 2013 these securities will no longer be able to be counted toward the bank’s reserves (“Tier 1 Capital,” closely watched by regulators).

The prospectus of most TRUPS, and certainly those of Citi’s, commonly include language that allows the bank to prematurely retire (“call”) their TRUPS if the government changes the rules of the game after the TRUPS is issued (which is exactly what happened when the Act was signed into law). A “premature call” is what happens if the bank exercises their option to call the TRUPS prior to the security’s published call date. In that event, the bank buys your shares back from you at $25.00 per share and the shares stop trading.

In most cases, that prospectus language says that while the bank is allowed to prematurely call their TRUPS, they must do so within 90 days of the “event.” All of Citi’s TRUPS have this 90 day limitation language, but it is not quite that simple.

The prospectus language defines such an “event” as either (a) the announcement of a change in the Tier 1 Capital formula or (b) the actual implementation of such a change.

That means that Citi has two windows during which they can prematurely call their TRUPS. The first window, now closed, was open for the 90 days following July 21, 2010 when the Act was signed into law (an announcement of a change). The second window, yet to be upon us, will open for 90 days beginning on January 1, 2013 when the change becomes effective.

So what is your exposure to a premature call of Citi’s thirteen TRUPS issues?

First, we can eliminate the seven Citi TRUPS that have already reached and exceeded their respective call dates: C-V (July 13, 2006), C-Z (September 17, 2006), C-S (February 13, 2008), C-R (September 30, 2008), C-Q (September 27, 2009), C-O (June 30, 2011) and C-U (September 15, 2011). These seven issues are not at risk of being prematurely called by Citi since these issues are already callable.

That leaves six Citi TRUPS that need to be looked at.

The next premature call window opens on January 1, 2013, so we can eliminate the four Citi TRUPS issues that will reach their published call dates between now and then: C-W (December 31, 2011), C-E (March 15, 2012), C-F (August 15, 2012) and C-G (December 15, 2012). You do not need to be worried about a surprise premature call for these four Citi TRUPS since they will have reached their respective call dates before the next premature call window opens on January 1, 2013. If you own shares of these four you are safe.

So we are down to the two remaining Citi TRUPS, C-J (March 30, 2015) and C-N (October 30, 2015). If you own shares of C-J or C-N the Act made your shares callable during the 90 days beginning January 1, 2013 regardless of their published call dates.

Remember, per the prospectus if Citi is going to prematurely call these TRUPS they must so within 90 days of the “event.” If Citi chooses not to call C-J and/or C-N during the first 90 days of 2013, the window closes again. In that event, your shares of C-J and C-N cannot be called by Citi until their published call dates (March 30, 2015 and October 30, 2015, respectively).

If you paid less than $25 per share for any of these Citi TRUPS congratulations are in order. You will earn a nice capital gain in the event of a call (premature or otherwise). If you paid more than $25 (which you should never do) pay close attention to the price and call status of your shares as explained here. You may still be able to avoid a capital loss by doing so.

Many Happy Returns.