Citibank 2008 Annual Report Download - page 186

In millions of dollars, except loans in billions 2008 2007
Loan amounts, at year end
On balance sheet $ 87.5 $ 93.5
Securitized amounts(1) 105.9 108.1
Loans held-for-sale —1.0
Total managed loans $193.4 $202.6
Delinquencies, at year end
On balance sheet $2,490 $1,929
Securitized amounts 2,655 1,864
Loans held-for-sale —14
Total managed delinquencies $5,145 $3,807
Credit losses, net of recoveries,
for the year ended December 31, 2008 2007 2006
On balance sheet $ 5,918 $3,877 $3,208
Securitized amounts 7,407 4,728 3,986
Loans held-for-sale ——5
Total managed $13,325 $8,605 $7,199
(1) Includes $1.2 billion in interest and fee receivables.
Funding, Liquidity Facilities and Subordinate Interests
Citigroup securitizes credit card receivables through three securitization
trusts. The trusts are funded through a mix of sources, including
commercial paper and medium- and long-term notes. Term notes can be
issued at a fixed or floating rate. The Omni Trust has issued approximately
$3.3 billion of commercial paper through the Commercial Paper Funding
Facility (CPFF).
Citigroup is a provider of liquidity facilities to the commercial paper
programs of the two primary securitization trusts with which it transacts.
Both facilities are made available on market terms to each trust. With respect
to the Palisades commercial paper program in the Omni Master Trust (the
“Omni Trust”), Citibank (South Dakota), N. A., a wholly owned subsidiary of
Citigroup, is the sole provider of a full-liquidity facility. The liquidity facility
requires Citibank (South Dakota), N.A. to purchase Palisades’s commercial
paper at maturity if the commercial paper does not roll over as long as there
are available credit enhancements outstanding, typically in the form of
subordinated notes. The Palisades liquidity commitment amounted to $8.5
billion at December 31, 2008 and $7.5 billion at December 31, 2007,
respectively. During 2008, Citibank (South Dakota), N.A. also became the
sole provider of a full-liquidity facility to the Dakota commercial paper
program of the Citibank Master Credit Card Trust (the “Master Trust”). This
facility requires Citibank (South Dakota), N.A. to purchase Dakota
commercial paper at maturity if the commercial paper does not roll over as
long as there are available credit enhancements outstanding, typically in the
form of subordinated notes. The Dakota liquidity commitment amounted to
$11 billion at December 31, 2008.
In addition, during 2008 Citibank (South Dakota), N.A. entered into an
agreement to provide liquidity to a third-party non-consolidated multi-seller
commercial paper conduit (the Conduit), which is not a VIE. Citibank
(South Dakota), N.A. provides this facility on market terms. The Conduit
holds a $3.6 billion bond issued by the Omni Trust. Citibank (South
Dakota), N.A. will be required to act in its capacity as liquidity provider as
long as there are available credit enhancements outstanding and if: (1) the
Conduit is unable to roll over its maturing commercial paper; or (2)
Citibank (South Dakota), N.A. loses its A-1/P-1 credit rating. At December 31,
2008, the liquidity commitment for this transaction was $4.0 billion.
In October 2008, Citibank (South Dakota), N.A. acquired subordinated
bonds issued by the Omni Trust having an aggregate notional principal of
$265 million. The issuance of these bonds by the Omni Trust to Citibank
(South Dakota), N.A. was effected in order to avert a downgrade of all of
Omni Trust’s outstanding AAA and A securities by Standard & Poor’s. The
subordinated notes pay interest installments and principal upon maturity in
December 2009. As a result of this action, the Company is currently holding
ongoing discussions with Board staff from the Federal Reserve regarding the
application of the associated risk-based capital requirements. The action will
increase risk-weighted assets for purposes of calculating the Company’s risk-
based capital ratios. However, the timing and extent of the increase is not yet
certain, pending completion of discussions with the Federal Reserve.
In December 2008, the excess spread for the Master Trust fell below the
trigger level of 4.50%. Beginning in January 2009, this event requires the
excess cash in the Master Trust to be diverted to a spread account set aside for
the benefit of the investors in the Trust, instead of reverting back to Citigroup
immediately. The excess spread is a measure of the profitability of the credit
card accounts in the Master Trust expressed as a percent of the principal
balance outstanding. If the three-month average excess spread stays between
4.00% and 4.50% of the outstanding principal balance, the required funding
of the spread account is $680 million. The funds in the spread account can
only be paid to investors if the Master Trust goes into liquidation. If the
three-month average excess spread moves back above the 4.50% trigger level,
the funds in the spread account will be released to Citigroup.
In February 2009, Standard & Poor’s placed its BBB rating on the Master
Trust Class C notes on “ratings watch negative.” This status applies for 90
days, at which time Standard & Poor’s will re-evaluate the credit rating of
the bonds unless Citigroup takes action in the interim. In response, the
Company has decided to issue a Class D note as well as subordinate a portion
of principal cash flows due to the Company in the form of non-certificated
seller’s interest. Citigroup expects to issue the Class D note in the second
quarter of 2009 and to effect the subordination of seller’s interest cash flows
in March 2009. Should these actions be deemed satisfactory, the Class C
bonds will be removed from “ratings watch negative” and the BBB rating
will be affirmed by S&P. If these actions are executed, Citigroup’s risk-
weighted assets will be increased, but the timing and extent of such increase
would not yet be certain pending resolution of discussions with the Federal
Reserve.
Mortgage Securitizations
The Company provides a wide range of mortgage loan products to a diverse
customer base. In connection with the securitization of these loans, the
Company’s U.S. Consumer mortgage business retains the servicing rights,
which entitle the Company to a future stream of cash flows based on the
outstanding principal balances of the loans and the contractual servicing
fee. Failure to service the loans in accordance with contractual requirements
may lead to a termination of the servicing rights and the loss of future
servicing fees. In non-recourse servicing, the principal credit risk to the
Company is the cost of temporary advances of funds. In recourse servicing,
the servicer agrees to share credit risk with the owner of the mortgage loans,
such as FNMA or FHLMC, or with a private investor, insurer or guarantor.
Losses on recourse servicing occur primarily when foreclosure sale proceeds
of the property underlying a defaulted mortgage loan are less than the
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