Enrique Arzac

Back-Door Equity Financing: Citigroup's $7.5 Billion Mandatory Convertible Issue

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Abstract:
Raising equity via convertible securities is a roundabout procedure that can lead to erroneous conclusions in the absence of careful evaluation. How can one determine if issuing convertibles is a better alternative to the straight issuance of common equity? In this paper, we attempt to answer this question in the case of Citigroup by estimating the implied common equity price from its $7.5 billion convertible issue and comparing it to a common equity offering. In doing so, we provide a simple procedure for calculating the implied common equity proceeds of convertible issues.

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