Friday 6 March 2009

GIC weighs its options


GIC officials 'are looking at all options on how to limit the damage,' said one person familiar with the matter. 'I wouldn't be surprised if they cut their stake to avoid a huge loss through dilution, but there is no decision yet.' A Citigroup spokesman in Hong Kong declined to comment.

1 comment:

Guanyu said...

GIC weighs its options

6 March 2009

Dow Jones reported that the Government of Singapore Investment Corp is considering a number of long-term options following its decision to convert its multibillion-dollar investment in Citigroup preferred shares into common stock, including a gradual reduction of its stake, according to people familiar with the matter.

These people cautioned that a decision is likely far off and that the sovereign-wealth fund, known as GIC, could continue to remain a Citigroup investor or even invest more. But the fund’s deliberations reflect the uncertainty surrounding investors of the ailing US bank. Investors in its common shares could be hit if the US government steps in again to help the company.

GIC officials ‘are looking at all options on how to limit the damage,’ said one person familiar with the matter. ‘I wouldn’t be surprised if they cut their stake to avoid a huge loss through dilution, but there is no decision yet.’ A Citigroup spokesman in Hong Kong declined to comment.

GIC has routinely maintained that its investments have a long time horizon. Spokeswoman Jennifer Lewis declined to comment on whether GIC still considers itself a long-term investor in Citigroup or whether it is working on an exit strategy.

In a written statement, GIC Chief Investment Officer Ng Kok Song said he expects the profitability of US banks to be impaired in the next two years because of the challenging economic climate.

‘Adequate capitalization will help cushion against larger-than-expected losses, should they occur. GIC’s view is that with this latest move, Citigroup’s capacity to weather the severe economic downturn will be strengthened,’ he said.

GIC’s decision to convert came last week as the US Treasury agreed to convert up to US$25 billion (S$38.7 billion) of its own preferred stock to common shares in an effort to enhance Citigroup’s capital base, giving the US government roughly a one-third stake in the troubled banking giant. GIC agreed to convert its preferred shares into common stock at US$3.25 a share in a move that will boost its stake in Citigroup but will leave it more vulnerable to possible dilution.

GIC Deputy Chairman Tony Tan said at the time of the original investment that preferred shares would ‘give appropriate downside protection’ and that decisive action had been taken ‘to further strengthen the balance sheet and profitability of the bank.’

GIC has some tough choices to make, said the people familiar with the matter. It can wait and risk dilution in the hope that Citigroup’s shares will recover. It could invest more to maintain its stake if the US government ends up investing more. Or it could start cashing out before the share price sinks further.

GIC, which has a total investment portfolio of about US$200 billion, has invested heavily in distressed financial institutions, including buying a 9 per cent stake in UBS AG. People familiar with the situation have said GIC lost more than $50 billion on its investments last year.