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See CUSIP 172967AS0, issued by Citigroup in 1998, with a 6.875% coupon and a maturity date in 2098, a 100-year bond. Fidelity says this bond is continuously callable, so why didn't Citigroup call it even after the 2008 crisis when rates were practically zero?

Clearly the market doesn't believe it will be called, since bids are well above par value, about 122 as I write this. Is this some sort of reputational indicator for the bank, to indicate that they are well-capitalized enough to pay above market rates?

2 Answers 2

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Two main reasons:

  1. The bond is callable, but it has a "make whole" provision, which means that the issuer does not just pay the par value when calling the bond, but it must pay the PV of all future payments, using a discount rate higher than "comparable Treasury rates". So it would have to pay more than the face value of the bond (and possibly more than the market value).

  2. The bond expires in 2098, so a "comparable" interest rate in 2008 would have been a 90-year treasury bond, which didn't exist. I am not certain exactly how a 90-year treasury rate would have been determined, but it would have been much higher than 30-year rates, which were relatively low but not zero.

It's also likely that Citi hedged their interest rate risk so that the drop in interest rates did not actually hurt them as much as if this was the only bond they had issued, so there may have been no financial need to call the bonds just becasue rates dropped.

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    The last paragraph is irrelevant because it doesn't affect the marginal cost/benefit of calling. They would still keep the hedging profit even if they did call. Companies will maximize profit, not decline higher profit because there is no "financial need".
    – nanoman
    Commented Dec 28, 2023 at 17:34
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    My main point was that even if calling the bond in isolation seems like a profitable move (which it probably wasn't due to the MW provision) there might be other considerations that negate it - They may have needed to unwind hedges at a loss that would have negated the profit of the call in isolation.
    – D Stanley
    Commented Dec 28, 2023 at 17:46
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    That still doesn't make sense to me. In the answer, you referred to a hedge that profited from a drop in rates ("hedged their interest rate risk so that the drop in interest rates did not actually hurt them as much"), yet now you refer to a losing hedge. In any case, whatever gain or loss may exist on a hedge has already occurred whether they unwind it or not. What's unique about calling a bond is that it isn't exchanging money for an asset at market price -- it's a contractual strategic action that can yield an immediate profit (much like refinancing a mortgage).
    – nanoman
    Commented Dec 29, 2023 at 12:11
  • Also, the answer seems backward about "comparable Treasury rates". The fact that a 90-year rate would be high would weigh in favor of calling, not against, because it reduces the PV payment owed.
    – nanoman
    Commented Dec 29, 2023 at 12:13
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It's worth noting that the bonds were originally issued by Travelers Group, not Citi. Insurance companies operate under different constraints than banks (asset-liability matching, prudential regulations, etc.)

They would only call the bonds if they can issue new ones at a lower cost, which may not be the case given the long-dated nature (I don't know how liquid the market is for 100-year corporate bonds) and credit rating of the issuer.

In 2008, the 30Y treasury (longest maturity) yield dropped to 2.7%, which isn't exactly zero. Considering the credit spread, the 6 7/8% coupon doesn't look too bad.

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