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who cares about the US shareholders
hno:
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Citigroup Pays to Keep Dividend After Mortgage Losses (Update2)
Nov. 27 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, is paying a ``junk bond'' rate to uphold Chairman Robert Rubin's pledge to preserve the company's dividend and weather this year's mortgage-market decline.
The 11 percent interest rate on $7.5 billion of convertible shares that Citigroup sold to the Abu Dhabi Investment Authority is almost double the rate it offers bond investors. Countrywide Financial Corp. paid 7.25 percent to Bank of America Corp., the second-biggest U.S. lender by assets, for bailout financing three months ago. Citigroup's common stock pays a dividend equivalent to a 7.1 percent yield.
Citigroup sought a cash infusion from the ruling family of Abu Dhabi, one of seven sheikdoms that comprise the United Arab Emirates, because losses on U.S. subprime-mortgage investments left the bank short of its own capital targets. The deal may dilute the value of Citigroup's stock, reducing 2008 earnings by as much as 20 cents a share, Bank of America analyst John McDonald estimated.
Citigroup shareholders are ``ultimately the ones who are paying,'' said William Smith, chief executive officer of Smith Asset Management in New York, which oversees $80 million, including about 70,000 Citigroup shares. ``If you look at 11 percent, that's basically junk bond yields, and so it's great for Abu Dhabi.''
Writedowns on mortgage-related securities including so- called collateralized debt obligations may cost the bank as much as $7 billion of profit this quarter, Citigroup said Nov. 4, when it ousted former CEO Charles O. ``Chuck'' Prince III.
Prince Ousted
In a conference call the following day, Rubin, a former U.S. Treasury secretary who joined the bank as a senior executive in 1999, said the company's board was committed to maintaining the dividend. Executives said they didn't need to cut the payment to get capital back above targets by the end of next June.
The 54-cent-a-share dividend costs Citigroup about $2.7 billion a quarter, based on 4.98 billion shares outstanding as of Sept. 30, meaning the capital infusion from Abu Dhabi is enough to pay almost three quarters of dividends.
Citigroup's stock has tumbled 46 percent this year, partly because of predictions from analysts including CIBC World Markets' Meredith Whitney that the bank might have to eliminate its dividend to shore up capital.
The Abu Dhabi investment gives Citigroup a way to raise capital ``without resorting to a dividend cut,'' CreditSights Inc. analyst David Hendler wrote today in a report. ``The rebuild of the balance sheet should be viewed positively over time.''
Viewed `Positively'
The shares rose 56 cents, or 1.9 percent, to $30.32 as of 4:17 p.m. in New York Stock Exchange composite trading.
Acting Chief Executive Officer Win Bischoff, who took over on an interim basis after Prince stepped down, said in a statement late yesterday that the funds will help ``strengthen our capital base.''
Mortgage writedowns cut Citigroup's ``tier 1'' ratio, a metric used to assess banks' ability to weather loan losses, to 7.3 percent on Sept. 30. The figure, while above U.S. regulators' 6 percent threshold for a ``well-capitalized'' bank, was below the bank's 7.5 percent target.
The capital infusion would push Citigroup's tier 1 ratio to about 7.9 percent, based on the Sept. 30 levels, Fitch Ratings said today in a report.
``Clearly, Citi has a problem with capital adequacy after the subprime crisis,'' said Giyas Gokkent, head of research at National Bank of Abu Dhabi PJSC, Abu Dhabi's biggest bank by market value. ``ADIA has seen an opportunity to get cheaply into a blue-chip stock.''
U.A.E. Investments
Abu Dhabi, an emirate along the Persian Gulf where oil was discovered in 1958, bought securities that convert to a stake of as much as 4.9 percent in Citigroup. The fund would rank as Citigroup's largest shareholder ahead of Los Angeles-based Capital Group Cos. and Saudi billionaire Prince Alwaleed bin Talal, data compiled by Bloomberg show.
The investment follows purchases by U.A.E. fund Dubai International Capital LLC in companies including London-based HSBC Holdings Plc, Europe's biggest bank by market value, and New York-based hedge fund Och-Ziff Capital Management LLC. In Abu Dhabi, state-backed Mubadala Development Co. agreed to buy 7.5 percent of Washington-based buyout firm Carlyle Group. ADIA also owns a stake in Leon Black's New York-based buyout firm, Apollo Management LP.
Oil Money
Abu Dhabi owns the world's fifth-biggest oil reserves. It channels oil surpluses to ADIA, which ranks as the world's biggest sovereign wealth fund with assets of $875 billion, according to July estimates by the London-based Economist Intelligence Unit. The authority will spend $40 billion this year to buy foreign assets, estimates Gokkent at the National Bank of Abu Dhabi.
``They have all this capital, and they're trying to diversify the economy and the wealth of Abu Dhabi away from hydrocarbons to other assets,'' said Henry Higdon, managing partner of Higdon Partners LLC in New York, which provides recruiting services to the Abu Dhabi investment arm. ``At 11 percent, it's a good deal, and they can sit there and be patient, and wait three to five years, not three to five months.''
The Citigroup equity units that ADIA will purchase can be swapped for as many as 235.6 million shares starting in 2010. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010, and Sept. 15, 2011.
`Very Bullish'
``The structure of the deal suggests that Abu Dhabi is very bullish, effectively participating in the upside beyond $37.24, and sharing in the downside below $31.83,'' said George Nikas, who helps manage $1 billion at Deutsche Bank AG in Sydney.
Abu Dhabi will receive a higher yield than Bank of America was promised with its $2 billion convertible preferred stock investment in Calabasas, California-based Countrywide, the biggest U.S. mortgage lender. The bank in August agreed to pay Bank of America dividends of 7.25 percent after being forced to draw on $11.5 billion of bank credit lines and after a Merrill Lynch & Co. analyst said the lender may be headed for bankruptcy.
Abu Dhabi's securities carry a higher interest rate partly because they must be converted at a price above where the stock is currently trading. That means the fund stands to lose if Citigroup's stock price falls. Bank of America can choose whether and when to convert its Countrywide securities, so the Charlotte, North Carolina-based bank can continue collecting the preferred interest rate if the stock falls.
``Abu Dhabi is on the hook to buy Citigroup stock,'' said John Bilson, a finance professor at the Illinois Institute of Technology's Stuart School of Business in Chicago. ``This thing does not have any option attached. This is more like a forward contract to purchase the stock.''
`Reasonable' Terms
The average fixed-rate preferred stock yields 7.7 percent, according to Merrill index data. The average high-yield, high- risk bond yields 9.5 percent, Merrill data show. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. Countrywide is rated Baa3 by Moody's and BBB+ by S&P, while Citigroup has an Aa2 rating from Moody's and an AA rating from S&P.
Abu Dhabi will have ``no role in the management or governance of Citi, including no right to designate a member'' of the company's board, Citigroup said in its statement.
``This investment reflects our confidence in Citi's potential to build shareholder value,'' ADIA Managing Director Sheikh Ahmed bin Zayed al-Nahyan said in the Citigroup statement.
Alwaleed's Position
The transaction harks back to the investment made in 1991 by Prince Alwaleed, a nephew of Saudi King Abdullah. Alwaleed invested $590 million at a time when the bank needed cash because of loan losses in Latin America and a collapse in U.S. property prices. Alwaleed's stake is now worth about $6 billion. The prince wasn't available for comment at his Riyadh office today.
Mounting subprime losses have increased Citigroup's funding costs. The bank sold $4 billion of 10-year bonds on Nov. 14, paying annual interest of 6.125 percent. The securities were priced to yield 190 basis points more than Treasuries, up from 118 basis points, or 1.18 percentage points, in a similar sale three months earlier.
CIBC's Whitney said in a note to clients today that she still expects Citigroup to cut its dividend as mortgage losses increase.
The company's ``willingness to raise significant capital despite substantial share-price declines makes us hesitant to accept that this solves Citigroup's capital issues,'' Sandler O'Neill & Partners analyst Jeff Harte wrote today in a report.
who cares about the US shareholders
hno:-----------------------------------------------------------
Citigroup Pays to Keep Dividend After Mortgage Losses (Update2)
Nov. 27 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, is paying a ``junk bond'' rate to uphold Chairman Robert Rubin's pledge to preserve the company's dividend and weather this year's mortgage-market decline.
The 11 percent interest rate on $7.5 billion of convertible shares that Citigroup sold to the Abu Dhabi Investment Authority is almost double the rate it offers bond investors. Countrywide Financial Corp. paid 7.25 percent to Bank of America Corp., the second-biggest U.S. lender by assets, for bailout financing three months ago. Citigroup's common stock pays a dividend equivalent to a 7.1 percent yield.
Citigroup sought a cash infusion from the ruling family of Abu Dhabi, one of seven sheikdoms that comprise the United Arab Emirates, because losses on U.S. subprime-mortgage investments left the bank short of its own capital targets. The deal may dilute the value of Citigroup's stock, reducing 2008 earnings by as much as 20 cents a share, Bank of America analyst John McDonald estimated.
Citigroup shareholders are ``ultimately the ones who are paying,'' said William Smith, chief executive officer of Smith Asset Management in New York, which oversees $80 million, including about 70,000 Citigroup shares. ``If you look at 11 percent, that's basically junk bond yields, and so it's great for Abu Dhabi.''
Writedowns on mortgage-related securities including so- called collateralized debt obligations may cost the bank as much as $7 billion of profit this quarter, Citigroup said Nov. 4, when it ousted former CEO Charles O. ``Chuck'' Prince III.
Prince Ousted
In a conference call the following day, Rubin, a former U.S. Treasury secretary who joined the bank as a senior executive in 1999, said the company's board was committed to maintaining the dividend. Executives said they didn't need to cut the payment to get capital back above targets by the end of next June.
The 54-cent-a-share dividend costs Citigroup about $2.7 billion a quarter, based on 4.98 billion shares outstanding as of Sept. 30, meaning the capital infusion from Abu Dhabi is enough to pay almost three quarters of dividends.
Citigroup's stock has tumbled 46 percent this year, partly because of predictions from analysts including CIBC World Markets' Meredith Whitney that the bank might have to eliminate its dividend to shore up capital.
The Abu Dhabi investment gives Citigroup a way to raise capital ``without resorting to a dividend cut,'' CreditSights Inc. analyst David Hendler wrote today in a report. ``The rebuild of the balance sheet should be viewed positively over time.''
Viewed `Positively'
The shares rose 56 cents, or 1.9 percent, to $30.32 as of 4:17 p.m. in New York Stock Exchange composite trading.
Acting Chief Executive Officer Win Bischoff, who took over on an interim basis after Prince stepped down, said in a statement late yesterday that the funds will help ``strengthen our capital base.''
Mortgage writedowns cut Citigroup's ``tier 1'' ratio, a metric used to assess banks' ability to weather loan losses, to 7.3 percent on Sept. 30. The figure, while above U.S. regulators' 6 percent threshold for a ``well-capitalized'' bank, was below the bank's 7.5 percent target.
The capital infusion would push Citigroup's tier 1 ratio to about 7.9 percent, based on the Sept. 30 levels, Fitch Ratings said today in a report.
``Clearly, Citi has a problem with capital adequacy after the subprime crisis,'' said Giyas Gokkent, head of research at National Bank of Abu Dhabi PJSC, Abu Dhabi's biggest bank by market value. ``ADIA has seen an opportunity to get cheaply into a blue-chip stock.''
U.A.E. Investments
Abu Dhabi, an emirate along the Persian Gulf where oil was discovered in 1958, bought securities that convert to a stake of as much as 4.9 percent in Citigroup. The fund would rank as Citigroup's largest shareholder ahead of Los Angeles-based Capital Group Cos. and Saudi billionaire Prince Alwaleed bin Talal, data compiled by Bloomberg show.
The investment follows purchases by U.A.E. fund Dubai International Capital LLC in companies including London-based HSBC Holdings Plc, Europe's biggest bank by market value, and New York-based hedge fund Och-Ziff Capital Management LLC. In Abu Dhabi, state-backed Mubadala Development Co. agreed to buy 7.5 percent of Washington-based buyout firm Carlyle Group. ADIA also owns a stake in Leon Black's New York-based buyout firm, Apollo Management LP.
Oil Money
Abu Dhabi owns the world's fifth-biggest oil reserves. It channels oil surpluses to ADIA, which ranks as the world's biggest sovereign wealth fund with assets of $875 billion, according to July estimates by the London-based Economist Intelligence Unit. The authority will spend $40 billion this year to buy foreign assets, estimates Gokkent at the National Bank of Abu Dhabi.
``They have all this capital, and they're trying to diversify the economy and the wealth of Abu Dhabi away from hydrocarbons to other assets,'' said Henry Higdon, managing partner of Higdon Partners LLC in New York, which provides recruiting services to the Abu Dhabi investment arm. ``At 11 percent, it's a good deal, and they can sit there and be patient, and wait three to five years, not three to five months.''
The Citigroup equity units that ADIA will purchase can be swapped for as many as 235.6 million shares starting in 2010. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010, and Sept. 15, 2011.
`Very Bullish'
``The structure of the deal suggests that Abu Dhabi is very bullish, effectively participating in the upside beyond $37.24, and sharing in the downside below $31.83,'' said George Nikas, who helps manage $1 billion at Deutsche Bank AG in Sydney.
Abu Dhabi will receive a higher yield than Bank of America was promised with its $2 billion convertible preferred stock investment in Calabasas, California-based Countrywide, the biggest U.S. mortgage lender. The bank in August agreed to pay Bank of America dividends of 7.25 percent after being forced to draw on $11.5 billion of bank credit lines and after a Merrill Lynch & Co. analyst said the lender may be headed for bankruptcy.
Abu Dhabi's securities carry a higher interest rate partly because they must be converted at a price above where the stock is currently trading. That means the fund stands to lose if Citigroup's stock price falls. Bank of America can choose whether and when to convert its Countrywide securities, so the Charlotte, North Carolina-based bank can continue collecting the preferred interest rate if the stock falls.
``Abu Dhabi is on the hook to buy Citigroup stock,'' said John Bilson, a finance professor at the Illinois Institute of Technology's Stuart School of Business in Chicago. ``This thing does not have any option attached. This is more like a forward contract to purchase the stock.''
`Reasonable' Terms
The average fixed-rate preferred stock yields 7.7 percent, according to Merrill index data. The average high-yield, high- risk bond yields 9.5 percent, Merrill data show. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. Countrywide is rated Baa3 by Moody's and BBB+ by S&P, while Citigroup has an Aa2 rating from Moody's and an AA rating from S&P.
Abu Dhabi will have ``no role in the management or governance of Citi, including no right to designate a member'' of the company's board, Citigroup said in its statement.
``This investment reflects our confidence in Citi's potential to build shareholder value,'' ADIA Managing Director Sheikh Ahmed bin Zayed al-Nahyan said in the Citigroup statement.
Alwaleed's Position
The transaction harks back to the investment made in 1991 by Prince Alwaleed, a nephew of Saudi King Abdullah. Alwaleed invested $590 million at a time when the bank needed cash because of loan losses in Latin America and a collapse in U.S. property prices. Alwaleed's stake is now worth about $6 billion. The prince wasn't available for comment at his Riyadh office today.
Mounting subprime losses have increased Citigroup's funding costs. The bank sold $4 billion of 10-year bonds on Nov. 14, paying annual interest of 6.125 percent. The securities were priced to yield 190 basis points more than Treasuries, up from 118 basis points, or 1.18 percentage points, in a similar sale three months earlier.
CIBC's Whitney said in a note to clients today that she still expects Citigroup to cut its dividend as mortgage losses increase.
The company's ``willingness to raise significant capital despite substantial share-price declines makes us hesitant to accept that this solves Citigroup's capital issues,'' Sandler O'Neill & Partners analyst Jeff Harte wrote today in a report.
arty:
