What Is Certificate of Accrual on Treasury Security (CATS)?

Basics

In the early 1980s, Salomon Brothers introduced Certificates of Accrual on Treasury Securities (CATS), a novel financial instrument. During the years spanning 1982 to 1986, private banks issued these bonds, securing them through establishing specialized entities referred to as SPV/SPEs, thus establishing a direct link to the U.S. Treasury.

CATS represented a subset of securities introduced during this era, characterized by their feline-themed acronyms. Among these financial innovations were Treasury Income Growth Receipts (TIGRs) and Lehman Investment Opportunity Notes (LIONs). Merrill Lynch pioneered the introduction of TIGRs, setting the stage for Salomon Brothers to follow suit with their unique zero-coupon bond offering. This period marked an epoch of transformative financial ingenuity, with CATS at the forefront of this revolution.

Decoding CATS: A Unique Treasury Investment

Certificate of Accrual on Treasury Security presented a distinct investment opportunity, as they were initially sold at substantial discounts relative to their face value but could be redeemed at full face value upon maturity. What set CATS apart from conventional bonds was their lack of periodic interest payments in the form of coupons; instead, the price differential between the initial purchase and the face value was intended to simulate the accumulated interest over the bond's lifespan.

CATS, being government-backed securities, were perceived as exceptionally secure investments without inherent risks. This assurance stemmed from their guaranteed redemption at full face value upon reaching maturity. Nevertheless, the landscape changed as the U.S. government transitioned to directly issuing zero-coupon bonds through the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program, rendering CATS obsolete in the process. Today, CATS are no longer available for direct acquisition, save for occasional opportunities in the secondary bond market.

CATS Redemption and Legacy

In 1991, a scandal surrounding fraudulent activities engulfed Salomon Brothers, the pioneering issuer of CATS bonds. In response, the board of Salomon Brothers appointed Warren Buffett as both chairman and chief executive, a move aimed at restoring the bank's credibility and stability. In a series of developments, Salomon Brothers ultimately merged with the Travelers Group in 1997, subsequently becoming part of Citibank, which has evolved into the contemporary financial powerhouse, Citigroup.

The passage of time, coupled with bank conglomerations and mergers, has left many CATS bondholders in a quandary when seeking redemption. To expedite this process, bondholders should ascertain the Committee on Uniform Securities Identification Procedures (CUSIP) number unique to their bonds. This distinctive identifier serves to pinpoint the bond's issuing entity. Once the issuer is identified, bondholders can proceed to discern the responsible entity for bond redemption, resolving the complexity of the situation.

Conclusion 

A novel financial instrument introduced by Salomon Brothers in the early 1980s, represented a unique investment opportunity. While they were initially sold at a discount, they could be redeemed at face value upon maturity, setting them apart from conventional bonds. The U.S. government's transition to zero-coupon bonds rendered CATS obsolete, but they still hold value in the secondary bond market.