Europe Financial Bond: Citigroup’s €900m 11-year Tier 2 bond
Best of both worlds
In a year in which creative thinking and bold execution unlocked new and unexpected opportunities in primary markets, Citigroup’s triumphant, convention-breaking Tier 2 trade stands as an emblem.
2025 has been a banner year for reverse Yankee supply, in which US issuers across all sectors took advantage of funding costs in the euro market that were historically competitive versus US dollars. Even in that crowd, Citi’s subordinated bond stood out.
The €900m 11-year non-call 10 transaction, sold in mid-July, was the first subordinated US bank bond denominated in euros since the global financial crisis. While they have been regular euro issuers in senior unsecured format, major US banks had for years stuck to their home market for their capital needs.
Tim Michael, head of UK, Europe and MEA DCM syndicate and liability management at Citi, said the bank saw an opportunity, but capitalising on it was not straightforward.
How, for example, would European investors respond to the fact that US banks take a more strictly economic call policy on their capital bonds compared with European peers?
“How much investors would charge you for that call policy was unknown,” said Michael.
That policy also informed secondary structural questions. How best to manage interest rate risk in the event of a non-call if Citi adopted a typical 10-year non-call five fixed-to-fixed euro Tier 2 structure?
Citi broke from convention and settled on an 11-year non-call 10 fixed-to-floating structure for the self-led deal, betting that investors would welcome a format more familiar in US dollars.
With that decision made, Citi acted on its convictions and took the bold decision to launch the deal on an intraday basis.
Some investors were caught by surprise – initially assuming there had to be some mistake, perhaps a typo. Surely, it was only a senior note? But the reception in the end was emphatic.
With no roadshow to solicit feedback, it was imperative that Citi got its pricing right.
The bank marketed the issue with initial price thoughts of mid-swaps plus 200bp area before going on to launch the deal at 165bp.
The development of the deal and its subsequent 3bp tightening on the secondary market indicated that pricing had been well judged. Orders peaked above €6.8bn before settling above €5bn after terms were set.
Citi was rewarded with a roughly 15bp saving versus the level at which it would have issued an equivalent deal in US dollars.
Citi’s pricing of the deal also crystallised a 40bp senior-subordinated differential versus its euro senior bonds, historically tight by euro market standards but in line with the differential between Citi’s curves in the US dollar market.
“By every measure it was an outstanding result,” said Michael.