Good move???

[Ironstarz]

Feb 27, 2009

GIC agrees to conversion

SINGAPORE'S Government Investment Corporation (GIC) has agreed to convert its convertible preferred notes in Citigroup to common stock.

 

Said GIC in a statement on Friday night: 'Citigroup's exchange offer enables GIC to exchange its convertible preferred notes to common stock at an exchange price of US$3.25 (S$5.03) a share, compared with the conversion price of US$26.35 under the original terms of the investment.

 

'As a result, GIC's equity ownership of Citigroup will rise to an estimated 11.1 per cent, without any injection of additional funds.'

 

GIC added that it 'supports the initiative by Citigroup and the US government to strengthen the quality of the bank's capital base in view of the challenging economic environment.'

 

The GIC's decision came afrer Citigroup Inc. reached a deal on Friday that will give the US government up to a 36 per cent stake in the struggling bank. The government, along with other private investors, will convert some of their preferred stock in Citi to common shares.

 

Citi will offer to exchange up to US$27.5 billion of its existing preferred stock held by private investors at a conversion price of US$3.25 per share, a 32 per cent premium over Thursday's closing price of US$2.46. The government will match up to US$25 billion of preferred stock it currently owns for conversion at the same price.

 

If the maximum amount of preferred stock is converted, current common stockholders will see their ownership stake fall to about 26 per cent. The conversion will help provide Citi the mix of capital to withstand further weakening in the economy.

 

GIC, Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors, Capital World Investors are among the private investors that said they would participate in the exchange.

 

One of the hardest hit banks by the ongoing credit crisis, Citi has already received US$45 billion in cash from the government and guarantees protecting it from the bulk of losses on US$300 billion of risky investments.

 

Under the exchange agreement, the Treasury Department's remaining US$20 billion in preferred shares will be converted into a more senior preferred stock that carries an 8 percent cash dividend rate.

 

Citigroup said the increase in government ownership will not require additional taxpayer money. The government currently holds about an 8 per cent stake in Citi.

 

As part of the agreement, Citi will suspend dividends on both its common stock and preferred shares.

 

[Silver_blade]

Does that means that in the event that Citibank is nationalised...the common share will become worthless?

[Ironstarz]

If they don't convert, maybe we might lose all our stake if Citibank become nationalised

If convert, we can always hope for the 0.00001% chance that Citibank ultimately recover from this financial turmoil, in many years time.

 

 

 

3.25. The loss is NOT realised until the shares are sold . GIC is left with 2 choices:-

1. Hold perpetual preference shares at conversion at $26. These are pretty much worthless unless Citigroup share prices goes above $26.

 

OR

 

2. Convert at 3.25. At least there is a fighting chance of making money, compared to $26.

[Ironstarz]

honestly it may be a sensible move but can anyone share their insights, almost bought their shares , but wanted to wait and see first

[Lebet]

The people in power will just continue to say, "short-term lost probably, but long-term gain. We are investing for 10, 15, 20 years". I find the Reuters article more illuminating.

 

 

Singapore GIC converts Citi notes, pays $3.25/shr

Reuters - Saturday, February 28

* Singapore wealth fund GIC converts notes at $3.25/share

 

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* GIC's stake in Citi will rise to estimated 11.1 percent

 

By Neil Chatterjee and Saeed Azhar

 

SINGAPORE, Feb 27 - Sovereign wealth fund the Government of Singapore Investment Corp said on Friday it will convert its Citigroup <C.N> preferred shares into common stock in a bid to shore up the troubled U.S. lender.

 

GIC said it would exchange its convertible preferred notes to common stock at a price of $3.25 a share. Based on Citi's opening share price of $1.67 on Friday, GIC has realised a loss of around half its investment. This also compares with the conversion price of $26.35 under the terms of the original investment.

 

GIC said its stake in Citi would rise to an estimated 11.1 percent.

 

"It now means GIC 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 [TEM.UL], 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 may vary 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 in Citigroup were trading 32 percent lower at $1.67 in early trade by 1445 GMT on Friday after announcing a deal that would increase the U.S. government's stake in the bank's common stock. [iD:nN27210042].

 

"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.

 

 

 

 

[Silver_blade]

Oh...so the GIC stands to lose all if they held on to preferred shares and the bank is nationalised...not the other way round? Thanks.