Citi bailout also bails out Singapore fund

September 23, 2009
Singapore Democrats

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Rick Carew, P.R. Venkat & Costas Paris
The Wall Street Journal

GIC had big loss before latest U.S. rescue. Now it has $1.6 billion profit and half the stake

Government of SingapoThe third bailout of Citigroup Inc. proved the charm for a Singaporean sovereign-wealth fund.

Government of Singapore Investment Corp. said Tuesday that it took in a $1.6 billion profit by selling about half of its holdings in Citigroup since converting its holdings from preferred shares to ordinary shares earlier this month. The sovereign fund’s remaining holdings are now below 5%.

Citigroup and AIG pace led a renewed rally in the U.S. financial sector Tuesday, earning some paper profits for taxpayers, who are the largest investors in both battered companies. MarketWatch’s Alistair Barr reports from San Francisco.

The reversal of fortune for GIC’s January 2008 investment of $6.9 billion into Citigroup is due to a sweetening of terms it won from the U.S. government as part of a bailout package negotiated in February 2009. GIC and other sovereign investors gave up their 7% annual coupon payment on the preferred shares and moved lower in Citigroup’s capital structure. In exchange, Citigroup reduced the conversion price of GIC and other investors’ shares to $3.25 a share from the $26.35 conversion price they had agreed in the original deal.

That move carried its risks as Citigroup’s stock teetered around the $1 mark in early March of this year and GIC’s holdings fell in value to just $2 billion. The stock has rebounded strongly since hitting those lows to reach $4.61 a share on Sept. 11 when the conversion of GIC’s stake to ordinary shares took place.

GIC took money off the table after the conversion by selling shares on the open market. It now is sitting on a further $1.6 billion paper profit on its remaining stake, GIC’s Chief Investment Officer Ng Kok Song said in a statement.

GIC plans to keep its stake in Citigroup because it is “confident of [Citigroup’s] long-term prospects,” the statement said. “A stake below 5% reflects GIC’s goals and desire to be a portfolio investor.”

Among other investors that invested alongside GIC were Prince Alwaleed bin Talal of Saudi Arabia and the New Jersey pension system. They appear to have received similar terms as GIC in the conversion. Chinese policy lender China Development Bank had considered participating in the January 2008 Citigroup offering, but China’s senior government leadership rejected the plan.

The favorable terms secured by GIC in the Citigroup bailout could give it bragging rights at home in Singapore. The city-state’s other major state-owned investment arm, Temasek Holdings Pte. Ltd., lost billions of dollars on its stakes in Merrill Lynch & Co. and Barclays PLC. Temasek sold out of those holdings in late 2008 and early 2009 before banking stocks staged a recovery.

Apart from its Citigroup holding, GIC also has a 9% stake in UBS AG, which it bought in late 2007.

The U.S. Treasury adjusted the terms for the foreign investors in Citigroup only after it had built up a major stake in the bank itself. Prior to the February bailout, the Treasury took $25 billion in Citi stock and warrants in October last year as part of $125 billion rescue package of eight major financial institutions. Then in November, the U.S. Treasury put an additional $20 billion into Citigroup as its stock tumbled and agreed to protect Citi against losses on a $301 billion pool of assets.