The management and board of Citibank have found a financial saviour in the form of the Abu Dhabi Investment Authority, which will buy new capital in the US bank equal to 4.9 per cent of Citi's capital base for US$7.5 billion.
The planned investment was first reported yesterday afternoon by the Wall Street Journal.
Citi is selling mandatory convertible securities to ADIA which pay a fixed coupon of 11 per cent. That is above the average yield on US junk bonds, which is 9.4 percent according to Merrill Lynch data and cited by
Reuters.
The securities are convertible into ordinary shares in Citibank in 2010 or 2011.
The bank's tier one capital ratio fell to 7.3 per cent at the end of the September 2007 quarter, which is below Citi's target of 7.5 per cent, and has fallen further since, the Financial Times reported. The securities sold to ADIA will lift that ratio by about 0.5 percentage points.
Citi took US$6.8 billion of write downs and losses in the September quarter and faces the potential for another US$11 billion of losses in the fourth quarter, Reuters reported. The losses largely relate to the bank's exposure to sub-prime mortgages and collateralised debt obligations whose declining values the bank owned up to somewhat later than competing banks and investment banks.
A bank prone to financial crises more often than most of the world's larger banks, Citi received a then vital capital injection from Saudi aristrocrat Alwaleed bin Talal in the early 1980s. He retains his equity in Citibank.
Citi fired its chief executive Charles Prince last month and is still searching for a permanent replacement. The bank's board appointed Win Bischoff, chairman of Citi Europe, as interim CEO earlier this month.
There's speculation of a major strategic review and even a breakup of Citi's disparate banking interests worldwide, though that task may have to wait for the hiring of a long-term chief. Charles Prince had already cast off the Travelers insurance business that his predecessor had laboured so hard to secure regulatory approval for in the late 1990s.