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Strategies & Market Trends : Value Investing

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To: Jurgis Bekepuris who wrote (29104)	11/28/2007 11:37:01 PM
From: Spekulatius	Read Replies (2) of 78702

Jurgis -re seekingalpha. I am not sure i fully agree with the commentators logic. For me the case is fairly simple. Citigroup needed a large chunk of cash, quickly and 11% was the interest rate that they got somebody who had the cash was interested. Why did they need the money quick? I assume the ratings agency were grilling them about the latest losses and threatening a credit rating downgrade. They are AA now and don't deserve it - so i assume the rating agency told them to come up with a 7B$ cash infusion to avoid an immediate downgrade. Credit rating downgrades are toxic for financials because they raise the cost of capital which goes directly toward the bottom line. And worse everyone will assume that the first downgrade is not the last one. So C decided that paying 850M$ interest/year is cheaper than a credit downgrade. I think the C's dividend will fall as well. The new management that is going to be installed is not going to be worried about the promise to keep the dividend. My best guess is that the dividend will fall to below 1$/share (0.8$/share annually would be my guess) so they leave themselves upside once the worst of the storm is over.

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