x Abu Dhabi, UAETuesday 25 July 2017

Kuwait turns profit on Citigroup

The Kuwait Investment Authority, the Gulf state's sovereign wealth fund said it realised a profit of US$1.1 billion as it sold its stake in the US bank Citigroup for $4.1bn.

The Kuwait Investment Authority (KIA), the Gulf state's sovereign wealth fund said it realised a profit of US$1.1 billion (Dh4.04bn) as it sold its stake in the US bank Citigroup for $4.1bn. The fund invested $3bn in Citigroup in January of last year to help replenish capital at the lender after it ran up investment losses linked to the US subprime mortgage crisis. It calculated its return on the investment at 36.7 per cent.

At the time, the KIA also invested $2bn in Merrill Lynch, the US investment bank hit by losses in the mortgage and housing markets. Merrill was eventually taken over by Bank of America. KIA converted its preferred Citi shares into common shares, before selling those shares over time. The announcement of the sale came days after it emerged that another sovereign wealth fund, the Abu Dhabi Investment Authority (ADIA), was to convert its Citigroup bonds into shares in the bank at more than seven times their current value.

The deal, which will come in four stages starting in March next year, is the culmination of an agreement between ADIA and Citigroup that was aimed at providing fresh capital for the bank. Some members of Kuwait's parliament criticised the KIA for its investment in Citigroup and Merrill Lynch as the financial crisis dragged shares in both banks lower. Bader al Saad, the fund's managing director, responded last June by saying the fund was a "long-term investor" and did not look at "temporary price fluctuations".

Under the ADIA deal, it will also have received nearly $3bn from the special dividend Citigroup agreed to pay in 2007 in return for its original $7.5bn investment. ADIA will get the last of its shares in September 2011. As part of the original agreement, ADIA would have taken a 4.9 per cent shareholding in Citigroup. However, the stake was reduced following the US government taking a 36 per cent share in the bank earlier this year in exchange for a $25bn bailout.

For a time last March Citigroup stock traded at less than $1 a share. Its shares closed at $4.06 on Friday in New York. GIC, the Singapore sovereign wealth fund that also invested in Citigroup, accepted a lower dividend of about 7 per cent but had the option to convert preferred shares into ordinary Citigroup shares at any time. This meant GIC was able to renegotiate terms with the US bank and make an agreement with US authorities. It made a $1.6bn profit from the sale of its stake after it had converted preferred shares to ordinary equity.

@Email:tarnold@thenational.ae