Showing posts with label Citibank. Show all posts
Showing posts with label Citibank. Show all posts

Thursday 25 February 2021

Citibank's USD 902 Million Revlon Payment - What's Not in the News

 


You’ve probably been reading about the mistaken USD 900 million payment made by Citibank acting as agent for Revlon.

As as well as the decision by the US District Court, Southern District of New York, that the lenders to Revlon who received Citibank’s erroneous payments of principal were not legally obligated to return the funds.

Let’s take a closer look as I think some details of the story haven’t been highlighter. 

Here’s the link to the 105 page decision.

As a starter it's a good introduction.

It’s well worth a read as it explains the background and facts of the erroneous payment and the legal precedent Banque Worms vs Bank of America International (Banque Worms) which “led” the court to its judgment.

Banque Worms establishes the right of creditor who receives funds in error from a debtor or the debtor’s agent to retain the funds and apply them against the debtor’s outstandings as long as the lender had no knowledge of the error when it received the payment.

This precedent thus overrides the concept of equity that typically governs payments received in error: if one receives funds in error, one is obligated to return the funds.

Background and Some Clarifications

The “USD 900 million” payment was actually for approximately USD 902 million: approximately USD 894 million in principal and USD 7.8 million in interest. Citibank received funds from Revlon for the (authorized) interest payment, but used its own funds for the (erroneous) principal payment.

Citibank were able to recover about USD 390 million from the principal payment, reducing its loss to some USD 504 million. 

The USD 894 million principal payment was made to two groups of lenders. Allocations are based on my calculations using data in the court decision.

  1. The first group received USD 341 million. They were involved in a non-cash exchange of one Revlon debt for another (a “roll up”). Based on the terms of the exchange, they were not to receive any principal payments. Thus, they would not be able to resort to the Banque Worms precedent cited above. This group returned the full USD 341 million in principal payments they received.

  2. The second group received USD 553 million. This group was not involved in the debt exchange. Therefore, they had no right to any interest or principal. Under Banque Worms they had a legal defense to retaining the funds because they did not “know” the transfer was in error when it was received. An important part of the refusenik lenders’ defense was that they were unaware of the “roll up” involving the first group. Some lenders in this group returned USD 49 million either because they or they agents were unaware of the possible Banque Worms defense or decided to return funds despite such knowledge. 

At first blush, this sounds like a case of human error.

A “fat” finger, a misplaced decimal point, or an error in calculation.

But there’s more to the story than that.

Each lender received a principal payment in the exact amount of its principal balance as well as the exact amount of interest due it to the date of the payment – which was not an interest payment date.

The error was due to a combination of factors – human plus limitations in Citibank’s perhaps inaptly-named Flexcube system.

Citi was attempting to perform a complicated and uncommon transaction. 

  1. The first “bit” of complexity was that this was a “roll-up” transaction. Some lenders were exchanging existing Revlon debt (positions in the 2016 Revlon loan) for positions in other Revlon debt.

  2. The second “bit” of complexity was that not all of the lenders in the 2016 Revlon debt were participating in the “roll-up”.

The lenders participating in the roll-up—whose positions were managed by Angelo Gordon (the Angelo Gordon Lenders)--were entitled to a cash payment of interest on the existing debt up to the date of the “roll-up”. They were, however, not entitled to any cash payment for principal. Revlon owed this group USD 341 million in principal.

Those lenders not participating in the roll-up were not entitled to any cash payment of either interest or principal. Revlon owed this group USD 553 million in principal.

What were the problems? And what were the “issues” surrounding Citibank’s systems?

Citi’s system could not process an interest payment to just the Angelo Gordon Lenders.

All lenders had to be paid interest.

To get the exchange done, Revlon agreed to pay (cash) interest to all lenders. Some USD 7.8 million.

If my calculations are right, Revlon paid approximately USD 4.9 million in interest to the non Angelo Gordon lenders. Interest that it did not have to pay on that day.  

In effect it prepaid this amount of interest. 

Small beer perhaps, but perhaps not so small for a company in Revlon's financial position.  

As well as, perhaps, opening itself to the charge of creditor preference were the egg to fall off the proverbial spoon. 

Further complicating matters, to achieve the “roll up”, the principal balances of the Angelo Gordon Lenders in the 2016 Revlon term loan had to be reduced.

Citi’s system required this be achieved using a principal payment.

To do this without the movement of cash, the principal payment would have to be made using internal Citi “wash accounts” (General Ledger accounts). The amount of the principal payment would be funded by debiting an internal Citi G/L account. Then the principal payments to each roll-up lender would be “paid” into an internal Citi G/L account. Then (presumably) each lender’s principal payment would be be used to purchase an equivalent amount in the other Revlon facility.

But there was the same problem as before.

Citi’s system could not apply this mechanism to only the Angelo Gordon Lenders.

All lenders would have to be “repaid”.

That means that the non participating lenders’ shares of the 2016 loan would have to be "repaid" using the Citibank G/Ls as above. But with a key difference. In the final step instead of “purchasing” shares in another Revlon loan, these lenders would “repurchase” their shares in the 2016 loan.

That wasn’t the only wrinkle.

To ensure that interest payments would be made in cash and that the principal payments would not, Citi’s ABTF (Asset Based and Transitional Finance Team) had to check three boxes on the Flexcube payment system: FUND, FRONT, and PRINCIPAL to override the standard settlement instructions. They also had to input the related G/L account numbers in each of the three fields associated with these boxes

You can see a “screen shot” of Citi’s Flexcube system on page 13 Figure 1.

This seems a rather complicated system. Unnecessarily complicated.

One that is not intuitive. What does FRONT mean? What does FUND? And thus subject to mistake.

Citi’s agents (Wipro) checked the box “override default settlement instructions” next to PRINCIPAL as well they input the internal G/L in the required field.

They did not do the same for FUND and FRONT.

There are two possibilities here. 

The first case: If settlement instructions means the details of where Citi was to pay the funds (to the creditors) then it would appear Flexcube “ignored” the two override inputs for PRINCIPAL.

I would have expected it to decline the transaction with a note “incomplete” or “inconsistent instructions”.

Also if the standard settlement instructions for the principal payment were “overridden”, shouldn’t the system have been unable to make the payment as presumably it did not have other settlement instructions?  

The second and more likely case: Settlement instructions meant the accounts that Citi should debit (the debtor's), the system processed a payment against an internal Citi G/L account that was it seems (note that caveat) designed for non-cash transactions.  

With 10/10 hindsight, it would seem that ideally the system should have been programmed to refuse such a transaction.  

Or perhaps more likely programmed to raise a warning -- You are attempting to make an external cash payment against an internal non-cash account.

As well, it would have been ideal if the warning message associated with the final release of funds had been more explicit. For example, “You are about to release an external cash payment of USD 902 million: USD 894 million in principal and USD 7.8 million in interest”.

Somehow the fact that Citibank had not received USD 894 million from Revlon and was “going out of pocket” was not reflected in Flexcube.  

Typically agent banks require a borrower to remit funds to a special “loan agent” account to cover loan repayments and only release payments to lenders when receipt of funds is confirmed. Banque Worms is one reason why.  

There are of course other reasons. The Agent wants to be certain it has received the funds and that the funds are in an account under its control, not the borrower's account.

As indicated above, and with admitted 20/20 hindsight, it seems there were several steps in the process where a fail safe mechanism in Flexcube could have prevented the payment.

That being said, the human element is not innocent here.

Citi’s Flexcube manual contained detailed instructions.

The three Citi employees charged with input of the payment, checking of details, and authorization (release) apparently assumed that checking the PRINCIPAL box and inputting the G/L number was all that was required.

The fact that this wasn’t a common transaction, that Citi’s mistakenly named Flexcube required workarounds to complete the transaction, that the size of the transaction was "large", and that Revlon’s credit was weak should have prompted additional steps by Citi’s staff.

Friday 5 August 2016

Department of Manifest Absurdity: Big US Banks Launch Ad Campaign to Demonstrate Their Worth to Society

If You Can't See the Obvious Link to Big Banks, Take as Many Looks as You Need Until You Can.



The New York Times reports (and when the NYT reports AA pays more than his useful careful attention even when the  reporting doesn’t cover metals) that big US banks are engaged in a major advertising campaign to demonstrate their societal worth and why they should be more loved

Not one to usually share the spotlight AA will uncharacteristically let the NYT speak for itself.  The Grey Lady’s comments are in quotation marks.  AA’s thoughts are indented and in italics.

“At both the Democratic and Republican conventions, the nation’s biggest banks were again cast as the bad guys, criticized as being too big and too risky.”

AA:  Note the charge “too big” and” too risky”.   How will the banks prove that they’re not reckless and a danger to national economies?   Glad you asked.

“This week, as the Olympic Games begin in Brazil, one of the big banks, Citigroup, is offering a rebuttal with a series of prime-time television and digital ads featuring images of sweaty athletes, the Space Shuttle and an early A.T.M.

[AA: Heartwarming video here, but be warned if you're a sensitive sort, you might break down crying.]

“Our business is helping Americans make progress,” the ad’s narrator says, as a runner with a prosthetic leg sprints down a track.

AA:  Impeccable logic. .Show hard working folks at their tasks which no doubt have something to do with banking.  What precisely isn’t clear.  Used an ATM? Have a credit card?  In any case a powerful rebuttal against "recklessness" and "riskiness". And one which shows big banks’ virtue.  Smart move as I believe there were some no doubt unfounded allegations about big banks’ ethics and morality.

AA understands from thoroughly unreliable sources that JPMorgan is preparing its own commercials.  Jamie Dimon, known for his no nonsense suffer no fools approach, is reportedly going to appear in a series of ads featuring animals.  Among the ads planned, one features Jamie with whales off the coast of London or Washington state (location yet to be finalized).   Another with cuddly puppies, ice cream, and adorable children.   Tag line:  “Banking making a kinder gentler future for all of us”.

As a banker, AA knows the value of getting a fee for advice, but in a spirit of reckless (I am a banker after all) generosity (here the analogy breaks down), some ways this “geometric logic” could be applied to other cases. 

Goldman is reportedly assisting the US authorities with inquiries into its conduct and fees (a cool half a billion) for the US$6.5 billion in notes (bonds to the layman) it arranged for 1MDB in 2012 and 2013.   Two of the note issues were to fund-–well at least partially—1MDB’s acquisition of power generation assets.  AA sees a compelling ad featuring Malaysian farmers toiling alongside their water buffaloes.  Sweaty and tired after a hard day’s work, they settle back to listen to one of the fireside chats given by Malaysia’s prime minister.  One old chap speaks up.  “I remember when we didn’t have power”.  Tears in his eyes, he turns to the camera, “Thank you, Lloyd”.

Several Malaysian businessmen—LOW, TAN, AZIZ--have been charged with misappropriating 1MDB funds (to use the US Department of Justice’s happy turn of phrase).  Some of the funds are alleged to have been used to acquire works of art as well as fund a Hollywood blockbuster.  Key the camera.  The Parthenon, the Coliseum (Rome), Hagia Sophia, the Pyramids.  Voice over by an actor with an appropriately sonorous voice (Morgan Freeman?)  “Culture is what defines a civilization.”  Pictures of The Rjiks Museum, Museuminsel, The Louvre, The Tate, The Metropolitan Museum of Art.  “Reflected in great art that is still accessible to us today.”   Pictures of the three gentlemen named earlier.  “Art patrons before they are businessmen.  Supporting culture in all its forms”.

And then there is the Islamic Republic of Iran.  Perhaps a harder case with some audiences.  I see a testimonial by Candy Charms who recently visited for some cosmetic surgery.  Nose, if you're interested. According to the Mirror, she said.  "Loved Tehran. The people are so kind and generous.  "Really overwhelmed by the whole trip. The people are so amazing.  Tag Line: “Amazing Iran.  Friendly people.  The most advanced medical care at a reasonable cost”.    Let’s go local with the link on this story from Gulf News as the Mirror article is accompanied by some unsuitable pictures.

Wednesday 13 October 2010

Dubai Courts: Potential Conflict of Jurisdiction Between Onshore and DIFC Court


Bradley Hope over at The National reports on the case between Taleem versus Deyaar and National Bonds.  In September the DIFC ruled that the case could be heard in its system.  Earlier National Bonds had sued Taleem in Dubai Civil Courts. 


Justice Chadwick of the DIFCC wisely did not issue an order to the DCC to stay their proceedings preferring sensibly to wait until he sees their ruling.  At that point if it is contrary to the DIFCC's then it will be time no doubt to seek the intervention of a higher power.  And hopefully this case will lead to a mechanism for co-ordination between the two courts on future such situations.

It seems this is all about a failure in precision to specify the governing law and judicial forum.  And so I'd mark this down to a lapse in one of the most routine matters of contract drafting.  As the episode of Shuaa's convertible securities, those of Citi Group, and those of  National Bank of Umm AlQaiwain show, it really does pay to pay attention.

And as with the examples cited above, the amount involved is no small beer -- AED236.6 million.  

Hard to understand this.  The parties to the examples mentioned above consider themselves sophisticated firms.  The amounts are substantial.  Yet they fall down on rookie mistakes?

Tuesday 7 September 2010

CitiGroup and Its Magical US$50 Billion in Deferred Tax Assets


While many in the Developed West are liable to ascribe magical powers to those from the East, the Hindu Fakir, a guru at an Ashram, a bank in Bahrain, there is magic aplenty - particularly of the accounting sort- all over the world.

Today we look at one of the USA's major banks with US$50 billion worth of  DTAs (roughly one-third its capital).  Under accounting standards, Citi has to earn some US$99 billion in taxable income over the next 20 years to fully utilize the DTAs.

Like me I'm sure you're thinking surely there must be an "Islamic" equivalent.  Perhaps a Deferred Zakat Asset.  I'll be watching my favorite financial institutions in Bahrain and Kuwait to see if this shows up in their financials.

In response to a comment from Chapter 11, I'd note that of Citi's US$50 billion in tax credits, approximately US$31.5 billion are disallowed from computation of regulatory capital.  See Note #4 on page 36 of its 2Q10 10-Q.

Sunday 10 January 2010

Kingdom Holding – Follow Up

So what happened after Kingdom Holding Company ("KHC") made the announcement on 5 January 2010 about its planed reduction in share capital and the donation of 180 million shares of Citigroup stock by Prince AlWaleed Bin Talal to KHC?

On 6 January, trading exploded (in a relative sense) from 1.4 million shares the day before to 28.6 million shares. KHC's share price rose from SAR 4.7 per share to close at SAR 5.15. This gain of SAR0.45 was roughly in line with the value of the Citi stock contributed by Prince AlWaleed (SAR 2.24 billion divided by 6.3 billion shares of stock outstanding).

On 9 January, trading was similarly elevated with 20.5 million shares changing hands. The closing price was SAR 5.00 per share.

Let's look a bit closer at trading on the 9th.  Details are at the Saudi Exchange website.
  1. With 6,3 billion shares, 20.5 million shares represent about 0.3% of total shares.  Looking at free float (5%), the day's trading is still small at 6.5% of free float (315 million shares).
  2. There were 3,987 transactions for an average "ticket" of 5,152 shares.  Retail.  Small investors.

Thursday 17 December 2009

Tie Your Camel First, Then Trust in God Part VI - The Implicit Guarantee Defense - Turnaround is Fair Play

According to the Financial Times, in deciding to make its investment in Citigroup the Emirate of Abu Dhabi "assumed the US government would make any investor in Citi whole".  They also apparently believed that "Citi is America" as the sophisticated head of another unnamed sovereign fund in the region so carefully summed up the matter.

The article also notes that ADIA plunked down US$7.5 billion after "only three days of due dilgence".

Seems it's not only sophisticated and sober investors and bankers from the West who believe in the implicit guarantee and apparently as well the Great Magic Pumpkin, though it may be lonely in the pumpkin patch at times.

Some hopefully helpful hints:
  1. "Too big to fail" does not mean too big to have one's share price go down, way down.  
  2. There appears to be a real unmet need in the region, particularly the UAE,  for courses in convertible bond/security basics and structuring. And thus a significant  business opportunity to be seized.
Earlier posts here and here.

Monday 7 December 2009

The Tail of Two Investments: Citibank and ADIA and KIA

No, AA's spell checker isn't off this morning, though it may take one more cup of Cafe Najjar to bring all the lights fully on.

Tail is a deliberate choice: 
  1. Barring a miracle or a negotiated settlement with Citi, one is facing a substantial loss beginning next March.  
  2. Another has just exited an from investment in Citibank at a hefty profit.   So we are at the tail of the investments.

The first is ADIA who back in November 2007 invested US$7.5 billion in Citibank mandatory convertible bond with an 11% coupon and conversion to take place between US$31.83 to US$37.24.  Around the time the deal was struck Citigroup was trading at $32 to $33 per share.  ADIA in effect sold Citi a put option (the right to sell Citi shares to ADIA at a fixed price).  As well  ADIA also gave Citi the first 17% of the upside (the movement in share price from $31.83 to $37.24).   ADIA only gets the upside  if the share price goes higher when for example say it would get Citi shares trading at $41 for $37.24.   An investor would do a deal like this if  its expectations for volatility in Citi's stock was low for  the option period. Or if it believed that volatility was all one way -- the upside.  ADIA recently was cashed out by Citi at the lower $31.83 price.  Citi's stock price is roughly US$4.00 now.  You can do the math on the  impending loss based on market price.   Here's an article from The National.  Recall AA's earlier post on the AED 1 billion camel.

The second are KIA who bought US$ 3billion  (I think Series B 1) from the US$12.5 billion convertible issue in January 2008 - roughly two months after ADIA's investment  The conversion price  was US$31.62 per share.  KIA has recently claimed a profit of US$1.1 billion.  Just in time for the interpellation sessions with the Majlis Al Umma.  You'll recall that earlier the MPs objected to the investment.   They say timing is everything! And that's not just investments but also politics.

Here's the WSJ article on KIA's US$1.1 billion profit.

So what happened?

As you'll recall, Citibank had an exchange offer mid year in connection with an "investment" by the US Government in its stock via the conversion of preferred shares.  Other preferred security holders were given the option of joining the deal. In fact it was a condition.  Uncle Sam agreed to match US$ for US$ any private sector conversions on these terms.  Some background here and here  and here.  In summary,  preferred securities could be exchanged for common shares at US$3.25 per share.  Citi was trading at approximately half that price at the time.

ADIA didn't participate in the exchange.  KIA did.

For the nominal value of its US$ 3billion of preferred stock, KIA would have gotten 923 million shares.   To reach the US$4.1 billion in sales proceeds mentioned in the articles, KIA would have had to sell at higher than the current US$4.06 per share.  Or  sell something over 1 million shares.  Perhaps it had an additional 86.8 million shares from capitalized preferred dividends?

Two questions remain:
  1. Who bought KIA's stock?  At what price?
  2. Can ADIA renegotiate its deal with Citi?  (It's unlikely the Citi's price is going to $31 in four months).