The cost of capital December 11, 2007 at 8:17 pm

There will be a fair amount written about the UBS writedown, so I’ll stick with the other part of the story, the mandatory CB it is issuing. This will pay a 9% coupon. Citi on the other hand, is paying 11% on the mandatory issued to plugs its capital hole. Assuming (which is a big leap) that both of them went for par, how do we explain this difference?

Update.To plug its capital hole, WaMu is issueing a perpetual pref convertible into common stock. This is still being priced, but the word is that it will pay a coupon of between 7.5 and 8%. It would be really interesting to get the details of all 3 of these instruments, their levels of subordination, conversion features and so on and put them in a capital structure model. WaMu’s is optional conversion rather than mandatory so it is not immediately obvious how it compares with the Citi and UBS offerings.

Meanwhile Morgan Stanley is paying 9% on its mandatory CB, issued to plug a $5B capital hole after taking a further $5.7B writedown.

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