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Monday, November 26, 2007


citi raises $7.5bn at punitive terms

via bloomberg.

Citigroup Inc., the U.S. bank searching for a new chief executive as it faces at least $8 billion of writedowns, agreed to sell as much as 4.9 percent of the company to the government of Abu Dhabi for $7.5 billion.

Citigroup will sell equity units to the Abu Dhabi Investment Authority that convert into common shares, the New York-based lender said today in a press release.

``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 CEO, said in the statement. It helps ``strengthen our capital base,'' he said.

ADIA, the sovereign wealth fund of the government of Abu Dhabi, is buying equity units that convert into Citigroup shares at prices ranging from $31.83 to $37.24 per share, on dates ranging from March 15, 2010, to Sept. 15, 2011, the U.S. bank said. The units will pay 11 percent annual interest.

ELEVEN PERCENT! that, folks, is the price of total desperation. citi certainly knows it is facing insolvency if it agrees to take on a deal like this.

the difficult part ot imagine is that this is probably the first of many bank recapitalizations, and has the virtue of being among the first. later infusions may come at even more punitive rates.

the initial reaction -- shares jump, treasuries slide. this is an oversold market looking for a catalyst, and it may have just found one.

UPDATE: meredith whitney of cibc commented interestingly on citi this morning on bloomberg television, noting among other things that 1) this is less than a quarter of the capital she believes citi must raise; 2) eliminating the dividend -- a certainty in her view -- brings in just $4bn a year; 3) citi is therefore still faced with the probability of asset sales; 4) most importantly, while citi cannot sell CDOs or RMBS in much quantity into these markets, it cannot improve its risk-weighted tier one capital ratio by selling treasuries and agency debt. this last is because of the risk weighting of the calculation -- divesting itself of the safest securities in its portfolio makes the remaining portfolio riskier, thereby requiring greater capital reserves to be held against it. such is citi's situation that the equity raised by selling treasuries wouldn't be sufficient to cover the increased reserve requirements! citi is thus still looking at having to sell well over $100 billion in assets including other, somewhat risker but still desirable assets -- such as credit card receivables -- in order to repair its tier one capital ratio even after ADIA's stake purchase.

UPDATE: wise words from minyan peter.

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lol! cool blog!

/square mile

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