Citi announced yesterday that it would sell $12.5 billion of convertible preferred securities to a consortium of investors. The Government of Singapore Investment Corporation (GIC) will invest $6.88 billion, and the balance will be bought by Capital Research Global Investors, Capital World Investors, the Kuwait Investment Authority, the New Jersey Division of Investment, Prince Alwaleed bin Talal bin Abdulaziz Alsaud, and Sanford Weill/The Weill Family Foundation.
The preferred securities pay a coupon of 7% and have a conversion premium of 20%, each subject to adjustment in certain circumstances.
The transaction coincided with fourth-quarter results declared yesterday which saw Citi writedown $17.4 billion in subprime related exposure. Citi also said that its revenues from alternative investments had declined as growth in client revenues was offset by lower revenues from private equity and hedge fund activities.
On the positive side, Citi said: ôMarkets and banking international revenues included strong double-digit revenue growth in Asia, Latin America, and Japan, and global wealth management revenues increased 27%ö.
But the good news could not outweigh the bad; Citi ended the year with a fourth-quarter loss of $9.8 billion.
Regarding the convertible, Citi said that investors had agreed to cap ownership at specific levels based on bank regulatory and foreign ownership provisions, and that none of the investors is acting in concert. GIC will own around 3.7% of the bank, while the split between the other investors was not released.
Public investors will be offered another $2 billion of convertible preferred securities, and in addition, a further issuance of non-convertible preferred securities will be made.
Citi lowered its quarterly dividend to $0.32 a share stating: ôThis dividend level is in line with CitiÆs business mix, capital needs, and growth opportunities for each of its business segmentsö. The US bank also said it will continue to sell non-core assets.
Vikram Pandit, who took over as Citi's chief executive less than two months ago, said: ôIn an uncertain environment, these actions put us on our front foot; focused on capturing opportunities that earn attractive returns for our shareholders.ö He also said the investments made by firms such as GIC signalled ôa clear vote of confidence in the future of this great institutionö.
Meanwhile, Merrill Lynch announced yesterday that it has issued $6.6 billion of mandatory convertible preferred stock. (Its fourth-quarter results are due on January 17.) The securities were picked up primarily by the Korean Investment Corporation, Kuwait Investment Authority and Mizuho Corporate Bank though TPG-Axon Capital, The New Jersey Division of Investment, The Olayan Group, and T Rowe Price Associates, on behalf of clients, also co-invested with the Asian and Middle Eastern investors.
The preferred securities carry a 9% dividend and are convertible in 33 months at a price based on the traded price at the time, with a minimum reference price set at $52.40 and a maximum reference price at $61.31. Investors will be subject to a one-year lock-up.
MerrillÆs recently appointed chairman and CEO, John Thain, highlighted that the Kuwait Investment Authority would provide the US bank ôwith additional opportunities to grow its presence" in the Middle East, while Merrill would be able to leverage the ôextensive corporate client base in Japan and deep network in China, the Pacific Rim and globallyö of Mizuho Corporate Bank.
Specialists were positive about the moves taken by both the Korean and Japanese investors, saying this will give the firms investing more exposure to global investment banking practices. The investment in Merrill marks the first time investors from both countries have participated in subprime bail-outs.
For both Citi and Merrill the announcements follow steps taken in late-2007 and reinforce that the full impact of the subprime situation may still not be known.
In November Citi announced it would issue $7.5 billion of shares to Abu Dhabi Investment Authority. At the time the Gulf-based investor became the largest shareholder in the bank with a 4.9% stake.
Then, on Christmas eve, Merrill Lynch said that Temasek and Davis Selected Advisors would subscribe to $6.2 billion of newly issued common stock.
Temasek invested $4.4 billion with an option to purchase an additional $600 million by March 2008. Analysts calculated that post-issuance Temasek owns 9.4% of Merrill Lynch. The Singapore firm has agreed to limit its ownership to 10% of Merrill Lynch's outstanding common stock. Davis Selected Advisors invested $1.2 billion.
With the new convertibles, as was the case with the 2007 issuance, both Citi and Merrill have not ceded any rights of control or role in governance to the investors.
The trend for Asian and Middle Eastern firms to bail-out beleaguered investment banks is increasing. Investors in these regions are flush with funds as their economies do well and they have little or no exposure to the subprime crisis. Bear Stearns, UBS and Morgan Stanley are three other firms that have benefited from large capital infusions over the last few months.
But some economists are now speculating about a cascading affect that could be felt globally, and especially in Asia, if the US economy moves into recession. Some of these investors could well find competing demands on financial resources from domestic firms should such a situation emerge.
Merrill Lynch's shares were down 3% in early trading yesterday to $54.29. Citi's shares lost 7.4% to $26.90. The Dow itself lost more than 2% during the day.