Tuesday, 27 November 2007

Desperate times at Citi

As CIBC world markets analyst Meredith Whitney predicted almost 4 weeks ago, Citigroup (C) has moved to shore up it's ailing capital position.

Citi Sells Stake to Abu Dhabi Fund

Citigroup said late Monday that the Abu Dhabi Investment Authority will invest $7.5 billion in the nation's largest bank, offering needed capital to offset big losses from mortgages and other investments.

The cash from the sovereign investment fund of the Gulf Arab state, which has been a beneficiary of this year's surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.'s equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.

The Investment Authority would become one of Citi's largest shareholders.

The Abu Dhabi investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said....

The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

At the time Merdith Whitney's article was published she also said that Citigroup's stock could trade in the low 30's. That has been another good call except I don't think she went low enough.

The Australian stockmarket was down over 100 points today and then reversed more than 60 points on the Citi news. It's amusing that dire moves such as this from Citi inspire confidence. That Citi had to go all the way to the middle east to find an interested investor should tell you something.

The exercise date of the investment into Citigroup shares is also interesting. Does Citigroup think it will take until 2010-2011 to get their ship in order?