Citigroup is selling up to 4.9 percent of itself for $7.5 billion to the Gulf Arab emirate of Abu Dhabi, giving the largest U.S. bank fresh capital as it wrestles with the subprime mortgage crisis and the resignation of its chief executive.
The capital injection will shore up Citi's balance sheet, which has been hurt by some $6.8 billion of writedowns and losses in the third quarter, and the potential for another $11 billion in the fourth quarter.
Citi is paying a high price for the capital injection by selling mandatory convertible securities to Abu Dhabi which pay a fixed coupon of 11 percent. That is above the average yield on U.S. junk bonds, which is 9.4 percent according to Merrill Lynch data.
Analysts at Royal Bank of Scotland said in a note that Citigroup was paying a "high price," but that the convertible notes would help boost the bank's core capital.
The sale to the $650 billion Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, may also signal the freefall in U.S financial stocks is close to ending, analysts said.
"Citi is big, it's widely followed, and when people see confidence in it, it should mean something," said Bo Brownstein, an analyst covering financial stocks at Cambiar Investors in Denver, Colorado.
The dollar rose against the yen on the news, and Japanese bank stocks also rallied. In Tokyo trading, Citi shares fell 4.2 percent for the day, but had been trading even lower before news of the Abu Dhabi deal.
Family ruled Abu Dhabi -- whose citizens number no more than 400,000 -- will be Citi's largest shareholder. The investment reflects the increasing financial might of oil-producing countries, which have benefited from a five-fold increase in the price of crude oil during the last six years.
Gulf investors have announced more than $70 billion of foreign acquisitions this year, more than in the previous two years combined.
Dubai International Capital, a private equity firm owned by the ruler of Dubai, said on Monday it made a "substantial investment" in Sony, while a separate Abu Dhabi entity earlier this month bought a $622 million stake in U.S.-based chip maker Advanced Micro Devices .
Gulf investors such as the state-owned Investment Corporation of Dubai have expressed interest in taking advantage of plummeting U.S. financial stock prices to buy.
Shares of Citigroup have plunged 42.5 percent during the last five months. Merrill Lynch which wrote down $8.4 billion of assets in the third quarter, is down 40.6 percent during the same period.
Abu Dhabi Investment Authority manages the surplus revenues of the government of Abu Dhabi, the world's sixth-largest oil exporter. Standard Chartered estimated in September its assets were worth $650 billion. Both Dubai and Abu Dhabi are members of the United Arab Emirates federation.
Sir Win Bischoff, Citi's interim chief executive said in a statement on Monday: "This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business."
State-run funds are keen for stakes in global banks, which can benefit from the development of emerging markets, a person familiar with the funds said.
Citi operates in over 100 countries, and has boosted its investments in emerging markets over the last 12 months.
More Than $100 Billion
Acquisitions in general have taken up some $25 billion of Citi capital over the last year, according to CIBC World Markets analyst Meredith Whitney.
Combined with writedowns in the third quarter and expected future writedowns, Citi may have to cut its dividend to replenish its capital, Whitney wrote on Oct. 31. She estimated that Citi would need another $30 billion of capital.
Citi said on Nov. 4 it does not plan to cut its dividend. On the same day, Citi said it may take $8 billion to $11 billion of additional writedowns in the fourth quarter, and that its chief executive Charles Prince was resigning.
Citi is also taking early steps to cut staff and reduce costs, according to press reports. Citi said earlier this year it was cutting about 5 percent of its staff, or 17,000 jobs.
On Monday, Citi shares closed at $29.80 on the New York Stock Exchange, falling below $30 for the first time in more than five years amid mounting concerns of further losses and writedowns. Citi's market value has fallen by more than $100 billion this year.
U.S. Senator Charles Schumer, who opposed Dubai Ports World's plan to purchase assets at six U.S. ports and raised questions about Borse Dubai's plans to swap stakes with Nasdaq said the Citi transaction will bolster the bank's competitiveness and "help preserve New York's status as the world's financial center."
After conversion, Abu Dhabi's stake would be larger than the current holding of Saudi Prince Alwaleed bin Talal, who is one of Citi's largest shareholders.
Prince Alwaleed acquired his Citi stake in 1991 when the bank struggled with Latin American loan losses and the U.S. real estate market collapse, and his shares in the banks were worth some $6 billion earlier this month.
Last month, Bear Stearns and China's CITIC Securities agreed to swap stakes and form a broad alliance. Bear Stearns had also been battered by the subprime mortgage crisis, and many investors had hoped its tie-up with a foreign bank would include a cash infusion.
Just a Regular Shareholder
The Abu Dhabi Investment Authority will have no special rights of ownership or control over Citi and no role in the management or governance of the bank, including no right to name board members.
The investment group is buying mandatory convertible securities that can be converted into Citi stock in 2010 and 2011 at prices ranging from $31.83 to $37.24 per share. The number of shares it receives will adjust based on Citi's share price, with a higher share price giving the investor fewer shares.
The securities will also pay a fixed coupon of 11 percent per year, payable quarterly. That may seem steep, but after accounting for the fact that 60 percent of that coupon is tax-deductible, the coupon rate is similar to the dividend rate on Citi's shares, a person familiar with the matter said.
The investment is expected to close within the next few days, Citi said.
Saeed al-Hajeri, executive director the Abu Dhabi Investment Authority, could not immediately be reached for comment.