Abu Dhabi Lifeline for Citigroup
Citigroup is in the process of assessing the impact of the credit crunch
US bank Citigroup has agreed to sell shares worth $7.5bn (Â£3.6bn) to an Abu Dhabi-owned investment company.
The Abu Dhabi Investment Authority will become the largest shareholder in Citigroup with a stake of up to 4.9%.
Citigroup has been hit hard by US mortgage-market problems and needs a fresh injection of capital to expand its business, the bank explained.
The problems led to the resignation of Citigroupâ€™s chief executive this month, and a slump in the bankâ€™s share price.
Citigroupâ€™s cash reserve has suffered after it had to write down the value of its loans made in the US sub-prime market by $7bn, and the potential for between $8bn and $11bn of further losses.
This investment reflects our confidence in Citiâ€™s potential to build shareholder value
ADIAâ€™s managing director Sheikh Ahmed Bin Zayed Al Nahayan
â€œThis investment, from one of the worldâ€™s leading and most sophisticated equity investors, provides further capital to allow Citigroup to pursue attractive opportunities to grow its business,â€ said Win Bischoff, Citigroupâ€™s acting chief executive officer.
The Abu Dhabi Investment Authority (ADIA) has agreed not to own more than a 4.9% stake, and will have no special rights of ownership and no role in the management or governance of the bank, Citigroup said.
Citigroup is one of the financial companies that have been worst affected by a crisis in global credit markets, which stemmed from a meltdown in the US sub-prime mortgage market.
The sub-prime sector lends money to people on low incomes or with poor credit ratings, and has suffered record defaults as a result of successive interest rate rises.
Banks had been heavily issuing these loans over the past few years when interest rates in many of the worldâ€™s main economies were at historic lows.
But the current higher borrowing costs and increased loan defaults have brought this lending to a sudden halt, and banks have been left with billions of dollars of debt that has lost most of its value.
Citigroupâ€™s boss Charles Prince was forced to quit his post shortly after the bank revealed a 57% drop in profits during its third quarter because of massive write-downs.
The companyâ€™s share price dropped below $30 in New York on Monday, almost half the value of their 12-month peak of $57 set on 28 December last year.
ADIA will buy securities in Citigroup, which will offer an annual yield of 11%.
The bonds will eventually be converted into shares between March 2010 to September 2011, at a price of between $31.83 and $37.24 each.
This suggests Abu Dhabi is enthusiastic about the bankâ€™s long-term future prospects, expecting the share price to climb back to its previous heights, analysts said.
ADIAâ€™s managing director Sheikh Ahmed Bin Zayed Al Nahayan said: â€œThis investment reflects our confidence in Citigroupâ€™s potential to build shareholder value.â€
Abu Dhabiâ€™s move is the latest example of the financial muscle of the oil-rich Gulf states, which have benefited enormously from booming energy prices and are now looking for new homes for their wealth.
Earlier this week, Dubaiâ€™s investment arm took a â€œsubstantial stakeâ€ in Japanese electrical giant Sony, which is nearing the end of a three-year restructuring process.