Singapore unlike Washington is going the whole nine yards to bail out Citi.
The Government of Singapore Investment Corporation (GIC) has decided to convert its entire $6.88 billion (10.6 billion Singapore dollars) investment in preferred shares to common shares.
The US government, on the other hand, will convert up to $25 billion of its $45 billion worth of preferred stock to common stock, reports The Times.
The Wall Street Journal earlier reported GIC wanted to retain preferred stock, which offered an annual coupon of 7 percent. Converting to common stock cuts off that income stream. But the US government made it clear it would convert preferred shares to common shares only to the extent other investors did so.
The Financial Times reports:
Analysts said the structure of the deal made it virtually impossible for common or preferred shareholders not to approve it as failure to convert the shares or ratify the deal would end Citi’s life as a public company.
GIC will become the bank's second largest shareholder with an 11 percent stake, according to Singapore’s Straits Times newspaper, while the US government will be the largest with a stake of up to 36 percent. Washington currently has an 8 percent stake, says a newspaper in Abu Dhabi, another big investor.
The Financial Times reports: GIC will exchange its preferred shares for 2.1 billion 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.
Preferred shareholders are being asked to convert to common stock to increase Citigroup’s tangible common equity and thus boost market confidence in the troubled bank.
But Citigroup shares tumbled 39 percent following the deal, which upset existing shareholders who will see their stake diluted by 74 percent, reports the Wall Street Journal.
At yesterday’s closing price of $1.50, Citigroup now has a market value of $8.18 billion, according to Google Finance – just over a billion more than GIC invested in January last year for what was then a 4 percent stake in the bank.
If Citigroup's market value is $8.18 billion, then GIC's 11 percent stake is worth $899 million — almost $6 billion less than its original investment. But that was the bank's market value on Friday. To check Citigroup's current share price and market capitalization, check Google Finance, Yahoo Finance or Reuters.
The Times adds:
Citigroup said it would convert up to $27.5 billion of preference shares held by private investors into common stock.
Prince Alwaleed bin Talal, the Saudi investor, and Capital, the American fund manager, will also take part in the conversion.
The National newspaper in Abu Dhabi reports:
Citigroup said on Friday that Abu Dhabi’s $7.5 billion investment in the struggling American bank was unaffected by the latest deal to convert preferred shares into common stock and that Citi would continue making interest payments to the emirate.
In the early days of the financial crisis in late 2007, the Abu Dhabi Investment Authority, the emirate’s largest sovereign wealth fund, joined a group of investors coming to Citigroup’s aid, buying a $7.5 billion debt instrument. Under the terms of that deal, Adia receives 11 percent interest a year in quarterly payments, but has to start converting its investment into 235.6 million Citigroup shares in March of 2010.
http://www.google.com/finance?client=ob&q=NYSE:C
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Going nine yards to bailout Citibank my foot. GIC is being “forced” by US Govt to convert.
Just look at the numbers reported by the Straits Times:
- At the conversion of US$26.35 per share, GIC’s stake used to be worth 4%
- GIC is converting at US$3.25 and is only getting like 11%.
if you divide US$26.35 by US$3.25, it’s like 8 times. 4% to 11% is less than 3 times. What’s happening?
Citibank stocks are being diluted to a point where if GIC doesn’t convert, what it holds might become worthless.
7% is really quite an attractive coupon rate and if the KTM runs GIC, he would be very adverse to giving it up. However, if it doesn’t convert and alleviate the debt burden on Citibank and the whole darn thing goes belly up, it might all go up in smoke.
These are tough times and options are limited.
“Preferred shareholders are getting more than the market price, converting their shares for $3.25 each. But GIC bought those shares when they were convertible for $26.35 each. It’s an epic fall.”
I think your numbers are a little mixed up. The lower the conversion price, the better it is for GIC, because they will get more shares for the same amount of investment. Take the following example:
Imagine GIC has an investment of $100. If the conversion price was $5/share, GIC will receive 20 shares. However, if the conversion price was $2/share, then they will receive 50 shares.
This is the case for GIC’s $6.88 billion investment, which now has a much better conversion rate of $3.25 compared to the original rate of $26.35. Based on the original rate, GIC would only receive about 261 million shares. At $3.25/share they will receive 2.1 billion shares.