Citi and Sovereign Funds: A Post-Mortem (Registration required)

I was remiss in not finalizing a piece on the effect on SWFs of Citi's preferred securities to common stock conversion a few weeks back. But a few queries encouraged me to finish and post it - so here it is... mostly written February 27/28 at the time of conversion. There has been a lot of talk about whether the U.S. government’s attempts to shore up the capital base of banks like Citigroup were being complicated by the stakes that sovereign funds and other ‘private’ investors took in the bank. Sovereign funds of Abu Dhabi, Kuwait and Singapore were among those that provided capital to the bank holding company back in November 2007 and January 2008, in exchange for fairly high interest payments.These deals varied in structure. GIC and likely Kuwait (along with others that co-invested with them like Saudi Prince Alwaleed bin Talal and Sandy Weill) have reportedly agreed to convert their shares. ADIA's investment, structured as debt, continues unaffected. See the press release for details on the conversions. Now most of the “private” holders of preferred shares have been encouraged to convert their preferred shares to common stock to boost the company's tangible common equity. “Encouraged” may be an interesting term given the carrot and stick approach. The stick of course was the loss of dividends paid to preferred shareholders. The carrot was getting a larger share of Citi than previously negotiated. Based on details relating to Singapore’s investment, the new shares seem to covert at around 3x the amount of equity from the initial deal, ie diluting common stock holders by 74-75%. It is not clear if the other preferred stock holders (those that trade freely) will convert on the same terms.