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IFM Case Presentation

CITICORP 1985

Submitted To: Prese

Dr. Gajavelli V. S GRO

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Citicorp.

Largest Bank holding company in US

Three core business units:

Highly Leveraged Capital Structure

Strong growth in assets require additional funding

InstitutionalBank

Individual Bank Investment Bank

EarningProportion

66% 19% 14%

Return on Avg.

Assets (as on1984)

0.88% 0.49% 1.25%

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The Problem

Money for banking division can't fund non-banking busine How to Raise money for the non-banking business

Equity or Debt?

Structure of Euro-Dollar issue? Fixed or Floating?

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Objectives

Evaluate

1. Fixed rate alternative

2. Floating rate alternative

3. Subordination

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Euro-Dollar Market

Dollar denominated bonds sold in European and someother countries

Traded in Non US and non issuing countries

Escape regulation by the Federal Reserve Board (GlassSteagall Act.)

Offers high rates of interest and greater flexibility ofmaturities

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Euro Dollar Fixed Rate Vs. Euro Dollar F

Euro Dollar Fixed Rate Euro Dollar FRN

Fixed Coupon Coupon rate resets to a referenc

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 sponsoredenterprises

Issued primarily by banks, soverei

governments and government spenterprises

Investors are high return seekers Investors are high return seekers

Corporate, commercial, institutional and

high-net-worth investors

Corporate, commercial, institutio

high-net-worth investors

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Possible FRN structures Domestic T-Bill based FRN- Coupon rate (1/8)% over 3 month T-

Cheaper than domestic and Euro-Dollar LIBOR based FRN

Narrowing T-Bill-LIBOR spread and higher margin demandmade it less attractive

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

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

Euro-Dollar FRN based on LIBID- Coupon rate based on spreadover three month LIBID

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All-in-Cost Analysis- Fixed Rate10 year Euro-Dollar, coupon 10.875% and front end fee of 2%

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%

Coupon Capital in $ maturity Upfront fee(2%)10.875 500,000,000 10 10,000,000

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All-in-Cost Analysis- Fixed Rate10 year domestic fixed rate at par, semi annual coupon rate 10.875% anfee 0.75%

*Semiannual coupon of 10.875%, So the effective annual rate is 11.1%

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%)

Coupon Capital in $ maturity Upfrontfee(0.75%)

11.1% 500,000,000 10 3,750,000

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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%

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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 becausethe yield is same for both. The difference between the two is LIBO

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 monthsLIBID in determining coupon payments.

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

Floating rate options are relatively cheaper

We would suggest Citicorp to go for the Eurodollar FRN's wmaturity with coupon of LIBID+3/16%, with an option tbetween 1, 3, and 6 month LIBID at beginning of each coupand an upfront fee of 0.3-0.5%.

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THANK YOU