GIC Hangs On Tenaciously
GIC lost $33 billion or S$50 billion in 2008. The bigger more secretive of the two Singapore SWFs however is not cutting its losses by selling its share of the Citigroup and UBS pies. Instead GIC is sticking to its strategy of holding on to its preferred shares that earns interest and therefore income. In Citigroup, the interest is 7% per annum. Citigroup, in self-preservation mode and looking for funds from anywhere, seems intent on a US government bailout this time.
Once Uncle Sam sticks his hands inside the pie and nationalises banks in one way or another, common stocks are arguably less an investment compared to preferred stocks. If the Northern Rock nationalisation and share buy back by the UK government is anything to go by, GIC is better taking the risk of clinging on to its 7% per annum income to weather any fluctuating share price.
FEBRUARY 23, 2009,
GIC Wants to Keep Preferred Stock
Singaporean Fund Is Unlikely to Convert Its Citigroup Shares
By COSTAS PARIS in Singapore and NISHA GOPALAN in Hong Kong
A major Singaporean investor in Citigroup Inc. doesn’t currently plan to convert its preferred shares into common stock as part of a potential U.S. government effort to help the ailing bank, according to people familiar with the matter.
But Government of Singapore Investment Corp., a sovereign-wealth fund that has seen the value of its initial US$6.88 billion investment in Citigroup plunge in recent months, could face a dilemma if the bank reaches an agreement with U.S. officials that includes a greater government role.
The Wall Street Journal reported Monday that Citigroup is in talks with U.S. officials that could give the government a stake of as much as 40%, though talks could still fall apart. The news cheered investors in several Asian markets because of the potential for greater stability in the financial sector if an agreement is reached.
Citigroup’s ability to support its offshore businesses could be curtailed by a bigger U.S. government stake in the bank.
Still, it sparked wariness in other corners of Asia, both at the Singaporean sovereign-wealth fund and among market participants concerned that greater U.S. government participation could result in a pullback by the bank in favor of its domestic market.
A spokeswoman for the Singapore fund, known as GIC, and a spokesman for Citigroup in Hong Kong declined to comment.
As part of the plan, Citigroup officials hope to persuade some investors holding preferred shares to follow the government’s lead in converting some of those stakes into common stock, according to people familiar with the matter. That would bolster a key measure of the bank’s financial health.
Those investors include GIC and other sources of government-controlled wealth, such as Abu Dhabi Investment Authority and Kuwait Investment Authority. Representatives of the latter two didn’t immediately comment.
GIC holds preferred shares in Citigroup that represent a beneficial 5.3% stake if converted, according to a U.S. Securities and Exchange Commission filing late last month. The preferred shares offer an annual coupon of 7%. Converting the preferred shares into common stock would cut off that income stream.
“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,” said one of the people familiar with the matter.
But a greater U.S. government role could increase pressure at Citigroup to halt dividend payments. If it then converted the preferred shares to common, GIC risks being diluted or wiped out if Citigroup needs another capital injection or is nationalized by the U.S. government.
The people familiar with the matter said at least some officials were surprised by the reports that Citigroup was in talks with the U.S. government.
GIC bought the convertible preferred securities in January 2008. Based on Citigroup’s US$1.95 closing price Friday, the stake is worth US$592.4 million. Citigroup shares were up 11% to US$2.17 in midday trading Monday on the New York Stock Exchange.
Last week, people familiar with the matter said GIC had an estimated overall investment loss of 50 billion Singapore dollars (US$33 billion) in 2008 as a result of tumbling asset prices around the world.
An agreement with the U.S. government could spark regulatory reviews in some parts of Asia. Analysts also said Citigroup’s ability to support its offshore businesses could be curtailed by a bigger U.S. government stake in the bank. Banks’ lending to foreign companies can shrink when their home governments take greater roles, said Keith Pogson, partner of global financial services with Ernst & Young.
Mr. Pogson said he is advising corporate clients “to ensure that they include a locally domiciled bank in their panel of banks from which they finance themselves.”
Some analysts say Citigroup might follow other multinational financial companies in selling foreign units, including some Asian operations.
People familiar with the matter said last week that Royal Bank of Scotland Group PLC hired Morgan Stanley to explore the sale of Asian retail and commercial operations and Australian operations it acquired when it bought part of ABN Amro Holding NV in 2007.
In Japan, Citigroup is already seeking to unload Nikko Cordial Securities Inc., one of the country’s top brokerages, after spending roughly 1.5 trillion yen ($16.1 billion) in January 2008 to make it a wholly owned subsidiary.
Insurer American International Group Inc. is shopping a stake in its non-Japanese Asian business that analysts have said could be worth $20 billion.
In December, Citigroup injected $800 million into Citibank Korea Inc. — the largest Citigroup subsidiary in Asia in terms of capital and assets — in order to raise its capital base. The move was spurred by South Korea’s banking regulator. At the time, Citigroup said it was the only regional unit to receive a capital injection and that the funds didn’t come from the U.S. Treasury Department’s Troubled Asset Relief Program.