GIC does not plan to convert Citigroup preferred shares

: WSJ Print

Tags: Citigroup | GIC
Monday, 23 February 2009 21:37

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GIC has no current plans to convert the preferred shares it owns in Citigroup Inc. into common stock, two people familiar with the situation said Monday to the Wall Street Journal. "If GIC is to convert into common stock, the deal must be sweetened quite a lot. They want to make sure that their return will be equal or above the coupon," one of these people said. GIC and Citigroup both declined to comment, reported the newspaper.

The dilemma for sovereign wealth funds with stakes in US financial institutions arose as it emerged that the U.S. government is finalising the taking of direct stakes in banks like Citigroup Inc. Elsewhere in Asia, banking regulators will likely look closely at the impact of a partial nationalization on banking units partly or wholly owned by Citigroup. And for Citi units in Asia, some of which were recently recapitalized by the parent company, the question will be whether those fresh funds will now flow back to the U.S. as the cash-strapped lender moves to pare back its presence overseas, reports the Journal.
In the same report, the Journal also said that Citigroup officials hoped to persuade such private investors as the Government of Singapore Investment Corp., Abu Dhabi Investment Authority and Kuwait Investment Authority to follow the U.S. government's lead in converting some of their stakes into common stock. That would further bolster an increasingly pivotal measure of banks' capital known as tangible common equity.

For Singapore's GIC, which earns an annual coupon of 7% on its preferred stock, converting its holding into common stock doesn't remove the risk of being diluted or wiped out if Citigroup needs another capital injection or is nationalized by the U.S. government.

In January 2008, GIC invested US$6.88 billion in convertible preferred securities of Citigroup, which at the time would have given it a 4% stake in the bank if converted to common stock. According to a Securities and Exchange Commission filing late last month, GIC now owns a beneficial 5.3% stake, or 303.8 million shares, in Citigroup. These include preferred shares that can be converted into 261.1 million common shares. Based on Citi's US$1.95 closing price Friday, the stake is worth US$592.4 million.