Singapore GIC converts Citi notes, faces $5 bln loss

March 2, 2009
Singapore Democrats

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Sovereign wealth fund 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 to common stock at a price of $3.25 a share, compared with the conversion price of $26.35 under the terms of the original investment.

It said its stake in Citi will rise to an estimated 11.1 percent. Based on a Citi market cap of $13.7 billion, this works out to a stake worth $1.52 billion, or a loss of $5.36 billion on its original investment, according to Reuters calculations.

“It now means they are in the real danger zone. Equity holders are the first to absorb any losses. Or if the Treasury decides to inject more capital, they will get diluted,” said an analyst at an investment bank, who declined to be indentified.

GIC is Singapore’s largest wealth fund with an estimated $300 billion in assets. Its sister fund Temasek Holdings, which also invested in global banks and lost over $2 billion on Merrill Lynch, saw its portfolio drop 31 percent in the eight months to November.

Singapore has only said GIC outperformed global equities in 2008. The government tapped its reserves for the first time for a budget stimulus package in January to try to cushion the country from its worst ever recession.

GIC bought in January 2008 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 instead of dividends that many vary from depending on the firm’s performance. By getting preferred shareholders to convert their holdings into common stock, Citi would be able to reduce its quarterly dividend payment.

“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.

Shares of Citigroup reversed an initial rise and fell 19 percent in premarket trade by 1230 GMT on Friday after announcing a deal that would increase the U.S. government’s stake in the bank’s common stock..

“Citi needs support right now and that is what the U.S. Treasury and investors are providing,” said David Cohen of consultancy Action Economics.

“Hopefully they can be rewarded as they are trying to help clean the mess in the global financial system. If you are not willing to take a risk, you can’t achieve a return.”

GIC’s executive director Tony Tan said this month unleveraged global investors such as sovereign wealth funds will pay a more important role in future as hedge funds and private equity find their activities constrained by tighter borrowing restrictions. Western governments, which have taken large stakes in banks to prop up their financial systems, will eventually have to “re-privatise” assets on a massive scale and will need to attract long-term institutional investors like sovereign funds when markets stabilise, he said.

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