Abu Dhabi to invest $7.5 billion in Citigroup

NEW YORK — The Abu Dhabi Investment Authority will invest $7.5 billion in Citigroup, offering the nation's largest bank needed capital to offset big losses from mortgages and other investments.

The cash from the sovereign investment fund of the Gulf Arab state, which has benefited from this year's surge in oil prices, will be convertible into no more than 4.9 percent of Citigroup's equity. Citigroup characterized the investment as passive and said the fund will not be able to name any board members to the bank.

The Investment Authority will receive equity units that pay an 11 percent annual yield — a high price for Citigroup, whose dividend yield is 7.3 percent. They will then be converted into Citigroup common shares at a price of up to $37.24 a share between March 15, 2010, and Sept. 15, 2011.

The purchase, announced late Monday, would make the Investment Authority one of Citi's largest shareholders.

John McDonald, a Banc of America Securities analyst, said the investment will buy Citi some time but will not fix the bank's debt troubles. "Capital infusions do not solve problems overnight," he wrote in a research note.

Investors, however, were relieved by the infusion and Citigroup shares rose 52 cents, or 1.7 percent, to close at $30.32 Tuesday, although shares traded at a new 5-year low of $29.50 earlier in the day.

But not everyone was enthusiastic.

"It's a bad deal," said CIBC World Markets analyst Meredith Whitney. "Someone was not using their calculator on this deal," she said, adding that a dividend cut would have been better for shareholders. She also said that selling off assets would help. It's hard to say which assets Citi would choose, but she said it could be anything "from credit cards to mortgages to Smith Barney."

Sandler O'Neill & Partners analyst Jeff Harte said in an interview the yield was in line with similar deals over the past couple years, and that the sale was reasonable given the tight credit markets.

However, he added, "their decision to raise capital given the current market is somewhat troubling. They may be more capitally constrained than we'd like to think."

Citigroup's shares have lost about 45 percent of their value since the beginning of this year, wiping away $124 billion in market capitalization, and touched a five-year low Monday as the drumbeat of bad news about its investment losses has grown more persistent.

Charles Prince stepped down as Citigroup's chairman and chief executive Nov. 4, the same day Citi announced that it will likely write down the value of its portfolio by $8 billion to $11 billion in the fourth quarter.

In the third quarter, the bank's exposure to assets tied to subprime mortgages led to a loss of about $6.5 billion.

Citigroup executives said Monday that a deteriorating business climate could mean a new round of job cuts, even after the bank pared its 320,000 work force by 17,000 positions earlier this year. Pummeled by billions in write-downs, Citigroup is reviewing its cost structure to bring it in line with "economic realities," the company said.

Analysts believe the Investment Authority is the world's largest sovereign wealth fund, although the fund has never publicly revealed its total assets. Analysts estimate the fund controls hundreds of billions of dollars, with some experts saying the amount could be approaching nearly a trillion dollars.

Sovereign funds throughout the Middle East have been building up overseas investments recently, much of it on the back of oil prices that have risen more than 60 percent this year, bringing record cash flow to the region. China and Russia also have considerable funds they are sending overseas.

Many companies have welcomed such investments because the funds tend to be stable investors, but some U.S. officials have expressed concern that their acquisitions could target sensitive industries with links to national security.

Abu Dhabi's move recalls the early 1990s investment in Citi made by Saudi Prince Alwaleed bin Talal. After the bank made some losing bets on U.S. real estate and Latin America, Alwaleed bought a stake for less than $600 million that has since ballooned into billions.

Associated Press reporters Sebastian Abbot from Cairo and Madlen Read from New York contributed to this report.