Abu Dhabi Deal Raises Questions About Citigroup's Health

Cash strapped Citigroup Sells Stake to Abu Dhabi Fund.

Citigroup said late Monday that the Abu Dhabi Investment Authority will invest $7.5 billion in the nation's largest bank, offering needed capital to offset big losses from mortgages and other investments.

The cash from the sovereign investment fund of the Gulf Arab state, which has been a beneficiary of this year's surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup Inc.'s equity.

The Abu Dhabi investment, which was expected to close within the next several days, will be considered Tier 1 capital for regulatory purposes, helping Citi reach its goal of returning to its target capital ratios in the first half of 2008, the bank said.

The Investment Authority will receive equity units that pay an 11 percent annual yield until they are converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

That announcement right on the heels of Massive Job Cuts shows just how bad things are at Citigroup.

Flashback November 1 2007
Analyst Raised Doubts About Citigroup's Dividend.

A longtime banking analyst said late last night that Citigroup may be forced to cut its dividend or sell assets to stave off what she said was a $30 billion capital shortfall, moves that could pull down its shareholder returns for several years.

The analyst, Meredith A. Whitney of CIBC World Markets, downgraded Citigroup’s stock to sector underperform, from sector perform, and called for the bank to bring precariously low capital levels more in line with its peers.

“We believe the stock will be under significant pressure and could trade in the low $30s,” she wrote. That would be as much as a 28 percent decline from yesterday’s $41.90

Citigroup’s management has said that it expects capital to return to its target levels in early 2008. It plans to use stock in its Nikko Cordial purchase, improving its balance sheet management, and not repurchasing stock until it bolsters its capital cushion.

Other banking and risk experts agree with Ms. Whitney’s analysis, however, and some suggest that it may even be conservative. Citigroup’s capital position “is too low based on the risks on the trading side but the kicker is that Citigroup is going to have a lot more losses” on the consumer side, said Christopher Whalen, the managing director of Institutional Risk Analytics. “It is going to be a one-two punch.”

Good call Meredith, on both stock price and on the need to sell assets.

The New Your Times offers this take on Abu Dhabi.

Citigroup announced last night that it was selling a $7.5 billion stake to a Middle Eastern sovereign fund in the latest bid to shore up its precariously low capital base.

Abu Dhabi’s 4.9 percent stake means that nearly 10 percent of Citigroup will be controlled by Middle Eastern investors. Prince Walid bin Talal already owns a roughly 5 percent stake after bailing out the company in the early 1990s.

The investment from Abu Dhabi underscores Citigroup’s precarious capital position, and also highlights the growing petrodollar wealth of Mideast countries, which are buying up assets and taking stakes in numerous American companies.

In addition to bolstering Citigroup’s capital base, which has dwindled to unusually low levels after a spate of acquisitions and recent credit market turmoil, the move should ease pressure on Citigroup’s dividend.

The company’s management has committed to maintaining its dividend while significantly bolstering its capital levels by the end of the second quarter of 2008.

Will this cure what ails Citigroup? It could if that was all that was needed but I doubt it. The "one-two punch” as described by Christopher Whalen has not even landed yet. It will.

Questions Raised

• Is Citigroup prepared for the mortgage mess to get far worse?
  
• What about losses on the consumer side as we slide into a severe recession?
• What happens when commercial real estate tanks?
  
• What happens when Citigroup needs another $7.5 billion, then another after that?
• When does the dividend get cut? (Citigroup denies that it will)
  
• Is Citigroup so bloated that it can afford another massive jobs cut?
  
• If not, then what business units have to be sold to downsize to the new number of employees?

Selling a 4.9% stake in the company is a step that is not taken lightly. Nor is another round of massive layoffs. All things considered however, Monday's news reports on Citigroup raise more questions than they answer. The one thing we do know for certain is that Citigroup was (and likely still is) severely capital restrained. On November 5th I said Citigroup Is Fighting For Its Financial Life. It still is.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com
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