Citigroup Inc's decision to raise $7.5 billion in capital is a signal to analysts and investors that the largest U.S. bank is likely to have a rough fourth quarter -- perhaps even worse than it has projected.

Citigroup may not be overpaying for the capital, according to convertible bond experts, but if the bank was ready to post excellent results in coming quarters, it would not likely be paying 11 percent a year for money from Abu Dhabi, investors said.

That's the negative part of the story. You wonder how bad charge-offs will be in the fourth quarter, or the first quarter, and why they need to raise the capital now, said Peter Kovalski, an analyst covering financial stocks at Alpine Woods Capital Investors, which owns Citigroup shares.

A spokeswoman for Citigroup declined to comment on speculation about the bank's performance in coming quarters.

Citigroup said Monday it is selling up to 4.9 percent of itself for $7.5 billion to the Gulf Arab emirate of Abu Dhabi, giving the largest U.S. bank fresh capital as it wrestles with the subprime mortgage crisis and a search for a new chief executive.

Citigroup is in a tough spot now. Its tier-one capital ratio -- a measure to assess bank soundness -- was 7.3 percent at the end of the third quarter, below the bank's target of 7.5 percent.

The bank recorded about $6.8 billion in write-downs and losses in the third quarter, and said on November 4 that it could write down another $8 billion to $11 billion in repackaged consumer debt in the fourth quarter.

Citigroup also said that number could change. And in subsequent weeks, markets for many mortgage-related securities have grown worse.

Analysts, on average, expect a loss of 33 cents a share in the fourth quarter before special items, and earnings per share before items of $1.00 in the first quarter of 2008, according to Reuters Estimates.

The new investment is not a complete negative. Citigroup is securing new capital that will help it continue to pay a dividend, wrote Glenn Schorr, an analyst at UBS, in a report entitled Glass half empty, or half full?

And Citigroup is not paying above-market rates for the financing, convertible bond experts said.

Some analysts have noted that 11 percent is a higher coupon than a junk bond, but mandatory convertible securities are riskier than bonds. Citigroup's dividend yield on common shares is about 7.25 percent, so if Citigroup were to issue shares, it would have to pay at least that rate.


It makes sense for Citigroup to pay more than that because under the terms of the securities, when they are converted into shares, the securities will get converted at a share price at least 6.8 percent higher than their value on Monday.

Abu Dhabi is giving up some of its right to earn capital appreciation from the shares, and must be compensated for doing so in the form of a higher coupon on the securities, traders said.

Issuing debt was not an option for Citigroup because it needed capital with Tier-1 status. If Citigroup had issued shares instead of mandatory convertible notes, its stock price would have likely fallen on Tuesday, a trader said.

Even if the 11 percent value was the market price, it's not cheap by the standards of the last few years, analysts said.

It's a function of the time we're in. You have capital markets that are very risk averse now, said Charlie Peabody, partner at independent research firm Portales Partners.