One of the complicated structures we worked on in my Tax Finance class at Kellogg were these inventions called DECS. They basically looked like a debt or preferred equity security, but were effectively a combination of buying stock while also buying and selling Puts and Calls on a stock. Essentially, the investor in the DECS trades upside in the stock (selling a Call) for an enhanced dividend or interest payment. Well, it had been a while since I thought of this instrument, until Citigroup issued a big stock offering yesterday.
On the surface, it looked like a terrible deal. Why would Citigroup raise a bunch of money at an 11% Preferred Dividend Rate? Way too expensive and must mean they're in trouble. At least that is what I thought. Then I came across this analysis of the security by Andrew Clavell and realized it was a DECS, just like the ones I studied at Kellogg.
It was actually a pretty cheap way of raising capital for Citigroup. I felt a little dumb for not seeing this right away. Thanks for passing it on Paul Kedrosky.