Saturday, February 28, 2009

GIC say 'Yes' to Citi

A few days ago I reap praise on Government of Singapore Investment Corp (GIC) for saying ‘No’ to Citigroup; I said it too soon.

I cannot believe that GIC have agreed to convert all their preferred shares in Citigroup into common stock. Now the price of US$3.25 is far below the originally agreed conversion price of $26.35 a share, but there’s a few thing we must consider:

1) Citi’s closing price on Thursday is at US$2.46 a share!
2) By converting, GIC will lose the 7% annual dividend that it has been receiving if it chose not to convert its holdings.
3) based on Thursday’s closing price of US$2.46 for Citi shares, GIC will now suffer a US$1.67 billion loss
4) data clearly show that the U.S. recession is going to get worse before it get any better with the U.S. economy shrinking more than expected in the fourth quarter of 2008
5) U.S. government has just taken a 36% stake in Citigroup (I don’t care if the Americans don’t want to admit it, that’s a nationalization of a bank)
6) GIC is now the second-biggest shareholder in Citi with a stake of about 11%, and Citi’s shares plunged 37% to US$1.55 at the start of US trading on Friday after the bank’s announcement. GIC is paying US$3.25; the current price is US$1.55. Do the math!
7) The profitability of all US banks is likely to be impaired in the next two years’ and Citi is still in danger

Now if Citigroup is still a viable entity, there will be no need for much a dramatic effort by the U.S. government to prop it up. GIC is making a loss investing in an ailing bank in a weak market with poor economic outlook on the horizon. After all this, can someone from GIC please come out and explain why in the bloody world they will do the conversion.


Anonymous said...

- definitely got more common shares by swapping at 3/share rather than 26/share, meant to offset loss of 7% coupon

- may be a good thing because US gov may not honor annual 7% because par stuck too high. this could even have been a precondition of pumping money to rescue C

- now having such a large % stake (10-11%) of C, we are in very dangerous position of being diluted even more OR being last in line when C does collapse OR share price goes to 50cents

- not sure if prince alwaleed or KIA got screwed this way too.

Ghost said...

Swapping at US$3 is still not a good deal when the price now is at US$1.55. Citi will most likely collapse or have some of its parts sold off because the shares are still going down. GIC just made their bad position worse by converting.
Prince Alwaeed got screwed like GIC but word is that KIA is looking to sue Citi. GIC should look into that

Anonymous said...

sorry something is off with your calculations, maybe you should go to singaporedaily and check out some reads along the same subject to reconfirm the numbers

Anonymous said...

To Anno 3:46,
I believe you are talking about the price of US$1.55. This is the price of Citi at the OPENING after the deal they had with the U.S government.

Anonymous said...

- GIC bought perpetual convertibles; meaning that the 7% coupon payment is perpetual, and convertible into common shares by buyer (GIC) at 20% above reference price. Seller (C) may also force conversion after 5 years if stock price exceeds 130% of reference price.

- Looks like GIC's hand got forced by C insisting that they convert so that C does not need to pay their debt liability of 7% coupon. Guess having Uncle Sam as a rescuer of last resort comes at loanshark terms.

- Don't forget that C would have pissed off other big investors like KIA and New Jersey Investment by reneging on their contract; not to mention Abu Dhabi (ADIA) during the first round of fund raising

- There is no cash flow exchange in this conversion exercise. Converting at 3/share gives more shares than 26/share against a base of USD6.88b. We just end up with more shares; this is good because C definitely gave a sweetener to GIC by offering more shares in exchange for sacrificing their perpetual coupon payment

- But bad because we got caught with our pants exposed since GIC never had any management control (board seats) in its original investments. The massive amount of common shares could become worthless paper, and GIC cannot do a thing about it.

- Furthermore, GIC just got demoted so far down the pecking order that in the event of bankruptcy / nationalization, GIC would be last to claim on any assets remaining. In other words, GIC is now a common investor like you and me on a risk protection level.

- I really hope I'm wrong in this analysis, but it is a dangerous precedent because all the other banks that took money from GIC and Temasek would surely try the same thing too

Ghost said...

Anno 3:46,
I’m not sure which of the numbers you are questioning but I can see 2 possibilities,
1) If it’s the price of US$1.55, here’s the basic timeline. Citi’s closed on Thursday at US$2.46, U.S government announced they are taking a 36% stake in Citi, Citi opened on Friday at $1.55. It closed on Friday at $1.50.
2) If it’s the price of US$31, that’s more complicated. GIC announced they struck a deal with Citigroup on Jan 15, 2008 to buy preferred Citigroup shares. The price of these preferred shares work out to $26. However under the deal, GIC must convert at a 20% premium which is where we get the price of around $31.
Hope I had cleared any confusion. If not, please leave a note and I’ll reply. Thanks

Anno 6:45,
GIC's hand was forced and because of this, several other investors are looking into bringing Citi to court. I feel GIC should join them.
As you say, GIC is down the pecking order at Citi, and I can see no way for them to get clear of troubled waters without bankruptcy, nationalization, or a fire-sale of their assets. All of which are bad news for GIC. Converting the shares is a bad deal no matter how you turn it.

Anonymous said...

Yeah, learning to eat 'steak' is very expensive. Anyway, some are said to be already leaving for the land of opportunities, and to the Dream. There are plenty of monies there now. They love their country, and the rhetoric works 100 percent perfectly. Till today there are still many suckers around ! Talking about intellectuals !

informed said...

"Web of Circumstances"

Anonymous said...

We have seen the recent Mumbai incident.

So what if another country is instigated to initiate a war ?

Alan Wong said...

I just wonder why was LKY appointed as an adviser to Citigroup in the first place. Other than knowing how to sue his political opponents and critics, what does he know about the US finance markets.

For all we know, he could have been taken for a ride by the Citigroup Board and blinded to make investment decisions to their advantage. He could also have been carried away by this stupid appointment and acted rashly with our national reserves.

Otherwise, as an adviser to Citigroup, how can he not know that the bank is in deep shit and prevented such a blunder, unless it is a scam appointment afterall.

For such a blunder, should he not have fired himself and sacked his PM son and daughter-in-law. And yet what we hear from him that HC's resignation has nothing to do with the losses.

What has becomed of the strict standards that LKY has set in the past for others?

Is he and his family members forever immuned from such accoutability?

Anonymous said...

Well, we have "sands", right !

Perfect exchange ?

It is all legal !

Not good in calculations, yet ?

Anonymous said...

Now that Citi shares are US$4 each, GIC has made US$0.75 billion (or S$1.125 billion).
Do you critics wish to take your words back?
You need to understand that investing in stocks has its ups and downs. If you call for people to be sacked when the price is down, do you re-hire them when the price is up?
Maybe our reserves should not be put into stocks (the people are too short-sighted and immature to withstand daily fluctuations). But that should be a national debate.

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