John Burton & Jamil Anderlini
The Government of Singapore Investment Corp on Friday said it would become the second-largest investor in Citigroup with an 11.1 per cent stake after it agreed to convert its preferred shares into common shares.
Under a deal co-ordinated with Citi’s agreement with the US government, GIC will give up a 7 per cent annual dividend provided by the perpetual convertible notes it acquired from Citi in January 2008 for $6.88bn.
GIC will exchange its preferred shares for 2.1bn common shares at a price of $3.25 a share against a conversion price of $26.35 under the original terms of the 2008 investment. But GIC said it would only suffer a 24 per cent paper loss on the conversion based on Citi’s closing share price on Thursday of $2.46 since its stake would be nearly three times the size of the 4 per cent stake it would have received under the original 2008 terms governing the preferred share conversion.
GIC still runs the risk of having its entire investment in Citi wiped out if the US nationalises the bank.
Citi lobbied GIC and others to convert their preferred shares into common stocks to prevent the US government from taking a majority stake in the bank.
The government is likely to match the conversion at a ratio of one-to-one, shoring up Citi’s tangible common equity, the ratio the market has been obsessing about recently as the group’s share price plunged. “GIC’s view is that, with this latest move, Citigroup’s capacity to weather the severe economic downturn will be strengthened,” said Ng Kok Song, GIC chief investment officer.
Sovereign wealth fund executives that put money into Citi expressed frustration. “They are not paying a dividend and have put the preferreds in a tough position,” said a senior executive with one fund that supplied Citi with capital.
The Abu Dhabi Investment Authority was less affected by the change since the structure of its security involves a mandatory conversion into equity between 2010 and 2011. People familiar with the matter say that ADIA, which invested $7.5bn in Citi in November 2007, will continue to get its 11 per cent coupon.
The experience with Citi is likely to induce even more caution in sovereign investors at a time when distressed US financial institutions are desperate for capital. The Citi investment was considered safe because of the high coupon the funds received on their securities.
Compounding the frustration was the fact that top staffers at Citi have not briefed the funds on a regular basis.
Citi “does not want to punish its shareholders”, said one person with knowledge of the matter. The bank reached out in a timely fashion to communicate with major shareholders, that person added. The news of the deal came when Kuwait was observing its independence day holidays.
Singapore GIC converts preferred Citi stock into common shares
Dow Jones Newswires
Government of Singapore Investment Corp. Friday said it has agreed to convert its preferred shares in Citigroup Inc. (C) into common stock at $3.25 a share.
The conversion price is well below the originally agreed conversion price of $ 26.35 a share. GIC said in a statement that after the conversion its stake in the troubled U.S. bank will rise to an estimated 11.1%
According to a Securities and Exchange Commission filing in late January, GIC held a beneficial 5.3% stake, or 303.8 million shares in Citigroup. These include preferred shares that can be converted into 261.1 million common shares.
The move comes after the U.S. government said Friday it is willing to convert up to $25 billion of its preferred stock in Citigroup to common equity in a move to protect shareholders against future losses.
“As a shareholder, GIC supports the initiative by Citigroup and the U.S. government to strengthen the quality of the bank’s capital base in view of the challenging economic environment,” GIC said.
Singapore’s GIC will convert Citi notes to stock
The Government of Singapore Investment Corp (GIC) said on Friday it will convert its Citigroup preferred shares into common stock in a bid to shore up the troubled U.S. lender.
GIC said it will exchange its convertible preferred notes for common stock at a price of $3.25 a share, which compares with a conversion price of $26.35 under the terms of the original investment.
“GIC supports the initiative by Citigroup and the U.S. government to strengthen the quality of the bank’s capital base,” GIC said in a statement.
In January last year GIC bought about $6.88 billion worth of perpetual, convertible notes in Citi that pay a 7 percent annual dividend. At that time the notes could be converted into about 4 percent of Citi’s expanded capital.
Preferred shares are similar to bonds in that holders received a fixed dividend. By getting preferred shareholders to convert their holdings into common stock Citi would be able to reduce its quarterly dividend payment.
Read also (23 Feb 09): GIC wants to keep preferred stock