The Abu Dhabi Investment Authority (ADIA) recently purchased $7.5bn worth of shares in Citigroup, the US's biggest bank in terms of assets. With many banks facing overstretched balance sheets, sovereign wealth funds (SWFs) are now seeing Western markets as increasingly attractive investment opportunities.
Citigroup has been operating under increasing financial strain from the subprime mortgage crisis and other investment losses, difficulties which resulted in the resignation of its former CEO, Charles Prince, on November 4. During the third quarter of this year, Citigroup recorded about $6.8bn in losses and write-downs and announced in November that it might write down another $8bn to $11bn in the fourth quarter. Citi's stock is trading at a five-year low and has fallen nearly 40% since the beginning of this year.
ADIA has purchased equity units in Citigroup that will yield 11% and must be converted into common stock between March 15, 2010 and September 15, 2011. The yield offered is almost twice the interest Citigroup offers to its bond investors. The recent investment makes ADIA Citigroup's largest shareholder at 4.9%, followed by Saudi Prince Alwaleed bin Talal's Kingdom Holding Company, which invested some $600m in Citigroup in the early 1990s during the last US mortgage crisis. As per the investment agreement, ADIA will have "no role in the management or governance of Citi, including no right to designate a member" of the company's board.
Win Bischoff, Citigroup's acting CEO, said, "This investment [...] provides further capital to allow Citi to pursue attractive opportunities to grow its business. ADIA is a significant participant in alternative investments and emerging markets financial services, two areas in which we have major positions and have been expanding."
Analysts at Morgan Stanley estimate that SWFs have invested more than $37bn in financial institutions during the eight-month period starting in April of this year as many banks have come under pressure in a challenging funding environment. Investments by SWFs from China to Russia to the GCC have met with mixed reviews by foreign governments who may be sensitive to the growing influence of these investment vehicles.
In the American political arena, the Citigroup investment was well received by leaders, including Senator Charles E Schumer, who had spoken out strongly against the attempt to purchase major US ports by Dubai's DP World. During a televised interview following the deal, Schumer said the investment was good for Citigroup and would allow the company to bolster its capital position and would help it to weather a difficult time.
In a market note on the sale, Morgan Stanley analyst Betsy Graseck said the purchase by ADIA "shores up [Citi's] capital base and reduces investment risk". Some insiders however say the $7.5bn cash infusion is not enough money to help the struggling bank. Meredith Whitney, a financial analyst at CIBC World Markets, suggested that Citigroup might be forced to sell more than $100bn of higher quality assets at a discount in order to raise the additional cash.
Regardless of the source, most experts agree that the investment terms are favourable for ADIA and a good opportunity for the SWF to invest in a blue-chip stock at an undervalued price. Sheikh Ahmed bin Zayed Al Nahyan, managing director of ADIA, said, "Citi is a highly respected company with a premier brand and with tremendous opportunities for growth. This investment reflects our confidence in Citi's potential to build shareholder value."
