As if we need further evidence of the imploding American economy, Citigroup just announced:
It is selling a $7.5 billion stake to the investment arm of the Abu Dhabi government, giving the largest U.S. bank fresh capital as it wrestles with the subprime mortgage crisis and the resignation of its chief executive. LINK
The purchase of up to 4.9 percent will make Abu Dhabi Investment Authority, the world's largest sovereign wealth fund, Citi's largest shareholder.
And you will not believe one of the reasons/explanations for the sale.
This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," Win Bischoff, Citigroup's acting chief executive said in a statement on Monday.
I would think survival would take precedence over growth.
The terms of the sale appear to be somewhat interesting, i.e., convertible securities that will pay a fixed coupon of 11%. I am no investment genius, but these terms appear to suggest Citigroup is desperate for capital, and even more interesting, this capital infusion, i.e., $7.5b, may be just a drop in a bucket as the subprime mortgage fiasco continues to unfold.
One thought may be Citigroup is courting/creating a major shareholder who will cooperate if and/or when Citigroup is forced into bankruptcy. Just a thought, no suggestion, as I said, I am no investment genius.
Under terms of the agreement, the Abu Dhabi Investment Authority will have no special rights of ownership or control and no role in the management or governance of Citi, including no right to designate a member of the board of directors.
The Abu Dhabi Investment Authority is buying mandatory convertible securities that can be converted into Citi stock at prices ranging from $31.83 to $37.24 per share. The number of shares the investment group receives will adjust based on Citi's share price, with a higher share price giving the investor fewer shares.
The securities will also pay a fixed coupon of 11 percent per year, payable quarterly.
Given the full impact of the resetting of the subprime mortgages is predicted to peek at or about April/May 2008, one must begin to wonder where the financial institutions will be going to obtain liquidity come Spring 2008.