IFM Case Presentation

CITICORP 1985

Submitted To:
Presented By:
Dr. Gajavelli V. S
GROUP 1 & 7

Citicorp.

Largest Bank holding company in US

Three core business units:

Institutional
Bank

Individual
Bank

Investment
Bank

Earning
Proportion

66%

19%

14%

Return on Avg.
Assets (as on
1984)

0.88%

0.49%

1.25%

Highly Leveraged Capital Structure

Strong growth in assets require additional funding

The Problem

Money for banking division can't fund non-banking businesses

How to Raise money for the non-banking business

Equity or Debt?

Structure of Euro-Dollar issue? Fixed or Floating?

Objectives

Evaluate
1.

Fixed rate alternative

2.

Floating rate alternative

3.

Subordination

Euro-Dollar Market

Dollar denominated bonds sold in European and some

other countries

Traded in Non US and non issuing countries

Escape regulation by the Federal Reserve Board (Glass

Steagall Act.)

Offers high rates of interest and greater flexibility of

maturities

Euro Dollar Fixed Rate Vs. Euro Dollar FRN

Euro Dollar Fixed Rate

Euro Dollar FRN

Fixed Coupon

Coupon rate resets to a reference rate

Exposure to interest rate risk

Protects against interest rate risk

No currency exchange risk

No currency exchange risk

Semi-annual coupons

Mostly quarterly coupons

Issued primarily by banks, sovereign

governments and government sponsored
enterprises

Issued primarily by banks, sovereign

governments and government sponsored
enterprises

Investors are high return seekers

Investors are high return seekers

Corporate, commercial, institutional and

high-net-worth investors

Corporate, commercial, institutional and

high-net-worth investors

Possible FRN structures

Domestic T-Bill based FRN- Coupon rate (1/8)% over 3 month T-Bills
Cheaper than domestic and Euro-Dollar LIBOR based FRN

Narrowing T-Bill-LIBOR spread and higher margin demand has

made it less attractive

Domestic LIBOR based FRN- Coupon rate (1/8)% over three month
LIBOR

Euro-Dollar FRN based on LIBOR- Coupon rate (1/16)% over three

month LIBOR

Euro-Dollar FRN based on LIBID- Coupon rate based on spread of

(3/16)% over three month LIBID

All-in-Cost Analysis- Fixed Rate

10 year Euro-Dollar, coupon 10.875% and front end fee of 2%
Coupon

Capital in $

maturity

Upfront
fee(2%)

10.875

500,000,000

10

10,000,000

IRR Calculation:
Annual Coupon amount = 10.875*500 Million=54.375 Million
* Using present value of future cash flows to find the IRR
490= (54.375/x)(1-(1/(1+x)^10))+ 500/(1+x)^10
x = 11.22%

All-in-Cost Analysis- Fixed Rate

10 year domestic fixed rate at par, semi annual coupon rate 10.875% and front end
fee 0.75%
*Semiannual coupon of 10.875%, So the effective annual rate is 11.1%
Coupon

Capital in

maturity

$
11.1%

500,000,000

Upfront
fee(0.75%)

10

IRR Calculation:
Annual Coupon amount = 11.1*500 Million=55.85 Million
* Using present value of future cash flows to find the IRR
496.25 = (55.85/x)(1-(1/(1+x)^10))+ 500/(1+x)^10
x = 11.29%
* Mr. Ancona target of 70-80 bp over T-bill (10.1%)

3,750,000

Floating Rate Alternative

Eurodollar LIBOR based FRN = LIBOR rate + (1/16)%

= 7.8
+ 0.06
= 7.86%

Domestic LIBOR base FRN = LIBOR rate + (1/8)%

= 7.8 + 0.125
= 7.925%

Subordination

Citicorp can issue debt at floating rate in two ways:

1. Eurodollar bond FRN with a coupon of LIBOR + 1/16% with .

30-.50% fees or LIBID + 3/16% with the same fees.
3-month LIBOR + 1/16% = 7.80% + 1/16% = 7.86%
Spread between LIBOR-LIBID is 1/8%. So,
3-month LIBID + 3/16% = 7.675% + 3/16% = 7.86%
So, there is no difference between using LIBOR and LIBID because
the yield is same for both. The difference between the two is
LIBOR does not worry about the spread getting wider.
2. Issue a long-term FRN with a coupon of LIBID + 3/16% with .
30-.50% fees, in which the bank gets to choose whether it uses 1, 3
or 6 months LIBID in determining coupon payments.

Conclusion

With coupon payment (7.86%) and upfront fee (.30-.50%) is

lower

Floating rate options are relatively cheaper

relatively

We would suggest Citicorp to go for the Eurodollar FRN's with 10

year maturity with coupon of LIBID+3/16%, with an option to
choose between 1, 3, and 6 month LIBID at beginning of each
coupon period and an upfront fee of 0.3-0.5%.

THANK YOU