Goldman Sachs sees value in Citi debt after rating cut

By siliconindia   |   Monday, 17 December 2007, 20:30 IST
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New York: Goldman Sachs, the Wall Street bank that profited most from its high risk bets on credit, said on that Citigroup's bonds were poised to outperform after its debt rating was cut and it unveiled a plan to rescue $49 billion of off-balance sheet investments. Goldman advised clients that Citi’s bonds had become compellingly cheap after Moody’s Investors Service cut Citigroup's credit rating for the second time in as many months. Moody’s cited concerns over the bank’s crumbling capital base as a result of the U.S. housing crisis for its one-notch cut to 'Aa3,' the fourth-highest grade. Moody's also said another downgrade, which raises borrowing costs, was possible if Citi fails to restore its capital ratios. The rating agency said it didn't figure in Citigroup's plans, announced hours earlier, to rescue $49 billion of structured investment vehicles. Citigroup plans to place the SIV assets on its balance sheet, which will further strain the firm’s capital levels and may mean a U.S. government-endorsed 'Super-SIV' bailout plan is no longer needed. "They have not had success with the Super-SIV. So what are you going to do? It’s the first act of the new chairman," said Carl Kaufman, portfolio manager at Osterweis Capital Management in San Francisco. "It's right to do and the right thing for the market." Citigroup's shares fell as much as 1.9 percent in early New York trading on the ratings news. They rose later on reports that Goldman raised its call on Citi's debt to 'outperform' from 'in-line.' The brokerage said it still believes that Citigroup will retain its double-A ratings at all agencies, even though S&P and Fitch could downgrade it by another notch to low double-A. Goldman said it believes the newly appointed Chief Executive Vikram Pandit will take appropriate action to raise capital levels in the first quarter either through additional third-party investments, dividend cuts or reduced risk-weighted assets. Moody's analyst Sean Jones said weak earnings at Citigroup would prevent it from restoring capital ratios quickly even after it raised $7.5 billion from the Gulf emirate of Abu Dhabi in November. The agency suggested ways the bank could rebuild, including raising more outside capital and reducing its dividend. A growing number of analysts see Citi as likely to reduce its dividend, which costs the bank about $2.7 billion a quarter. Standard & Poor's also said Citigroup credit ratings are ‘unaffected’ by its decision to consolidate its SIVs. Still, Citigroup's 'AA' ratings, the third highest, are on review for a ratings cut, S&P said on Friday. SIVs are off-balance-sheet vehicles set up by banks to invest in mortgage-backed bonds. Those securities have tumbled in value in the wake of a collapse in US subprime mortgages, or loans made to people with poor or non-existent credit records.