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Tuesday 3 March 2009
Citi Rescue Gives Prince, Singapore Sweeter Terms: David Reilly
It’s good to be a Saudi prince. And it’s good to be an investment company backed by the government of Singapore, or a former Citigroup chief executive. For that you get favoured treatment from Citigroup Inc.
Citi Rescue Gives Prince, Singapore Sweeter Terms: David Reilly
David Reilly 2 March 2009
(Bloomberg) -- It’s good to be a Saudi prince. And it’s good to be an investment company backed by the government of Singapore, or a former Citigroup chief executive. For that you get favoured treatment from Citigroup Inc.
It’s not so pleasant to be an average investor, say a mutual fund or insurer holding the retirement savings of average Americans. Then you just might get a kick in your keister.
That is what seems set to happen with at least one part of Citigroup’s latest bailout plan, announced Friday. The effort to shore up its finances calls for the conversion of up to $52.5 billion of preferred stock, including a big portion held by the U.S. government, into common stock.
The issue is the conversion terms. Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, the Government of Singapore Investment Corporation Pte Ltd. and a few other big holders of convertible preferred stock such as former Citigroup Chief Executive Sanford Weill and his family trust could get a better deal than many run-of-the-mill investors who hold regular preferred stock.
That shouldn’t be happening when U.S. taxpayers are propping up Citi and therefore preventing the prince and others from seeing their investments in the bank completely wiped out. It also stokes a perception that financial markets are increasingly becoming a rigged game.
Favoured Shareholders
Besides being a big holder of preferred stock, the prince is Citi’s third-largest common shareholder, with a 4 percent stake; the Singapore sovereign wealth fund isn’t a big common holder but bought about $6.9 billion in convertible preferred stock in January 2008.
They and others, including Weill and his foundation, purchased $12.5 billion of convertible preferred stock in January 2008 as Citi turned to private sources to raise capital in the face of mounting losses.
Other investors hold about $15 billion in preferred stock, according to data from CreditSights.
The preferred stockholders -- the big, favoured shareholders like the prince as well as other investors -- pretty much have to convert. If they don’t, their preferred stock will cease to pay dividends and likely become almost worthless.
The issue has to do with the way Citi will calculate the value of the preferred stock being converted into common shares.
The government plans to convert up to $25 billion of its preferred stock in Citigroup into common stock at a price of $3.25 a share. If the full amount is converted, the government would receive 7.7 billion new shares in Citi.
VIP Investors
The same formula will apply for the VIP preferred holders. The conversion price will be $3.25 a share, and the number of shares they receive will be derived by dividing the face value of their holding by that price.
The regular-Joe preferred holders won’t get as good a deal, according to a term sheet provided by Citi. These investors will receive new common stock based on the $3.25 conversion price divided into a value for the preferred that the bank only describes as being a “premium to market.”
In other words, the government and the big-time holders will see their converted shares based upon the full face value of their holdings. Regular investors will get less.
Who are the investors who stand to get short-changed? They include fund managers like Fidelity Management & Research and T. Rowe Price Group Inc., and insurers like Cincinnati Insurance Co. and Guardian Life Insurance Co., according to Bloomberg data. Another may turn out to be the Abu Dhabi Investment Authority, which in November 2007 bought trust preferred securities that will have to convert into common stock at a later date.
Many Unknowns
How badly will they get hurt? Citi hasn’t made that clear.
Most of the preferred stock has a market value well below its face value. In some cases, preferred stock with a $25 face value is trading in the teens or even lower.
So until Citi details the premium to market value that will be used for the conversion, it is impossible to say how badly these investors will fare.
The hope among some investors is that the difference in the terms of the exchange offer will end up being minimal. Indeed, Citigroup preferred securities rallied on Friday because any exchange might end up valuing them above what were beaten down prices.
That is beside the point. There shouldn’t be any difference at all.
Sure, bigger holders of securities often get a premium for their stake in transactions like this, especially when you’re dealing with someone who has as large a stake in the company’s common equity as the prince. Sometimes a premium like this is also offered to induce big holders to take part in a deal.
Sacrifices Aren’t Shared
That is fine for normal times. These aren’t them.
Even before this latest bailout was announced, Citi was under the control of the government. The government has decided to continue supporting Citi and didn’t need the acquiescence of the prince or Singapore to do that. If they balked, the government could have easily meted out punishment. At this point it is within the government’s power to wipe out all the equity holders, including preferred stock owners.
The government didn’t want to do that. Fine. There is no reason, though, why the big investors should be given more favourable treatment than the other guys.
Every American is being asked to sacrifice to help save the financial system. We shouldn’t have to also pay off Saudi princes, Singapore investment funds and Weill to boot.
Let’s hope Citi and its new owner, the U.S. government, realize this. They should adjust the exchange-offer terms so that they treat all investors in this bailout equally.
1 comment:
Citi Rescue Gives Prince, Singapore Sweeter Terms: David Reilly
David Reilly
2 March 2009
(Bloomberg) -- It’s good to be a Saudi prince. And it’s good to be an investment company backed by the government of Singapore, or a former Citigroup chief executive. For that you get favoured treatment from Citigroup Inc.
It’s not so pleasant to be an average investor, say a mutual fund or insurer holding the retirement savings of average Americans. Then you just might get a kick in your keister.
That is what seems set to happen with at least one part of Citigroup’s latest bailout plan, announced Friday. The effort to shore up its finances calls for the conversion of up to $52.5 billion of preferred stock, including a big portion held by the U.S. government, into common stock.
The issue is the conversion terms. Prince Alwaleed Bin Talal Bin Abdulaziz Alsaud, the Government of Singapore Investment Corporation Pte Ltd. and a few other big holders of convertible preferred stock such as former Citigroup Chief Executive Sanford Weill and his family trust could get a better deal than many run-of-the-mill investors who hold regular preferred stock.
That shouldn’t be happening when U.S. taxpayers are propping up Citi and therefore preventing the prince and others from seeing their investments in the bank completely wiped out. It also stokes a perception that financial markets are increasingly becoming a rigged game.
Favoured Shareholders
Besides being a big holder of preferred stock, the prince is Citi’s third-largest common shareholder, with a 4 percent stake; the Singapore sovereign wealth fund isn’t a big common holder but bought about $6.9 billion in convertible preferred stock in January 2008.
They and others, including Weill and his foundation, purchased $12.5 billion of convertible preferred stock in January 2008 as Citi turned to private sources to raise capital in the face of mounting losses.
Other investors hold about $15 billion in preferred stock, according to data from CreditSights.
The preferred stockholders -- the big, favoured shareholders like the prince as well as other investors -- pretty much have to convert. If they don’t, their preferred stock will cease to pay dividends and likely become almost worthless.
The issue has to do with the way Citi will calculate the value of the preferred stock being converted into common shares.
The government plans to convert up to $25 billion of its preferred stock in Citigroup into common stock at a price of $3.25 a share. If the full amount is converted, the government would receive 7.7 billion new shares in Citi.
VIP Investors
The same formula will apply for the VIP preferred holders. The conversion price will be $3.25 a share, and the number of shares they receive will be derived by dividing the face value of their holding by that price.
The regular-Joe preferred holders won’t get as good a deal, according to a term sheet provided by Citi. These investors will receive new common stock based on the $3.25 conversion price divided into a value for the preferred that the bank only describes as being a “premium to market.”
In other words, the government and the big-time holders will see their converted shares based upon the full face value of their holdings. Regular investors will get less.
Who are the investors who stand to get short-changed? They include fund managers like Fidelity Management & Research and T. Rowe Price Group Inc., and insurers like Cincinnati Insurance Co. and Guardian Life Insurance Co., according to Bloomberg data. Another may turn out to be the Abu Dhabi Investment Authority, which in November 2007 bought trust preferred securities that will have to convert into common stock at a later date.
Many Unknowns
How badly will they get hurt? Citi hasn’t made that clear.
Most of the preferred stock has a market value well below its face value. In some cases, preferred stock with a $25 face value is trading in the teens or even lower.
So until Citi details the premium to market value that will be used for the conversion, it is impossible to say how badly these investors will fare.
The hope among some investors is that the difference in the terms of the exchange offer will end up being minimal. Indeed, Citigroup preferred securities rallied on Friday because any exchange might end up valuing them above what were beaten down prices.
That is beside the point. There shouldn’t be any difference at all.
Sure, bigger holders of securities often get a premium for their stake in transactions like this, especially when you’re dealing with someone who has as large a stake in the company’s common equity as the prince. Sometimes a premium like this is also offered to induce big holders to take part in a deal.
Sacrifices Aren’t Shared
That is fine for normal times. These aren’t them.
Even before this latest bailout was announced, Citi was under the control of the government. The government has decided to continue supporting Citi and didn’t need the acquiescence of the prince or Singapore to do that. If they balked, the government could have easily meted out punishment. At this point it is within the government’s power to wipe out all the equity holders, including preferred stock owners.
The government didn’t want to do that. Fine. There is no reason, though, why the big investors should be given more favourable treatment than the other guys.
Every American is being asked to sacrifice to help save the financial system. We shouldn’t have to also pay off Saudi princes, Singapore investment funds and Weill to boot.
Let’s hope Citi and its new owner, the U.S. government, realize this. They should adjust the exchange-offer terms so that they treat all investors in this bailout equally.
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