x Abu Dhabi, UAESunday 23 July 2017

Panel rules for Citigroup in dispute

Abu Dhabi Investment Authority loses an arbitration dispute with Citigroup over a 2007 investment in the US banking giant

Adia had agreed at the onset of the financial crisis in 2007 to invest $7.5bn in
Adia had agreed at the onset of the financial crisis in 2007 to invest $7.5bn in "equity units" in the US banking giant. Courtesy Abu Dhabi Investment Authority

An arbitration panel in New York has ruled against the Abu Dhabi Investment Authority (Adia) in its dispute with Citigroup over a US$7.5 billion (Dh27.54bn) investment.

The ruling, which was handed down on October 14 but not announced publicly at the time, puts an end to the two-year disagreement in which Adia had alleged "fraudulent misrepresentations" by Citigroup in the dealings leading up to the transaction.

"An arbitration panel issued a final award and statement of reasons finding in favour of Citigroup on all claims asserted by the Abu Dhabi Investment Authority in connection with its $7.5bn investment in Citigroup," the banking company said in its quarterly earnings.

Adia had agreed at the onset of the financial crisis in 2007 to invest $7.5bn in "equity units" in the US banking giant. These paid interest to Adia and converted into shares in several stages in the future.

The value of Citigroup shares collapsed after the deal due to the mortgage crisis, prompting a US government bailout that diluted shareholders' equity and has left the stocks trading at 89 per cent below their price at the time of the agreement.

In 2009, Adia took the case to arbitration in New York, seeking to cancel the agreement or be paid damages of $4bn.

"Adia is disappointed with the decision of the arbitrators and is reviewing its options," a spokesman for Adia said. He declined to elaborate. Citigroup was not available for comment.

Citigroup was among a number of western financial giants that approached Gulf sovereign investment funds for cash injections after the US subprime meltdown. Merrill Lynch, Barclays Bank, Credit Suisse and Deutsche Bank all raised capital from Gulf states as the sector was shaken by the financial crisis.

Under the deal with Citigroup, Adia bought $7.5bn of convertible securities which it agreed to turn into shares on four dates between March last year and September 15 this year, at a price of $31.83 per share.

Adia agreed to buy no more than 4.9 per cent of Citi's stock, and opted not to appoint a member to the bank's board of directors.

The value of Citigroup's shares has been hammered by the financial crisis. Citigroup's stock price sank as low as $0.97 per share on March 5, 2009.

Soon after, Citigroup announced a reverse stock split, which took place in May this year and swapped every ten of the company's shares for one new share - boosting the share price tenfold in the process. The bank's shares closed on Friday at $30.34.

Adia took a paper loss on the share purchases, but this was to some extent compensated for by interest payments also included in the deal, which allowed Adia to recoup more than $2.5bn from the transaction.

In October 2008, Citibank received $45bn in US federal aid as part of the Troubled Asset Relief Program (Tarp), intended to stabilise the American financial system after the collapse of Lehman Brothers.

That was followed by a conversion of $25bn of government-owned preferred stock into common equity in February 2009 - significantly diluting existing shareholders' equity.

Victoria Barbary, the managing director of Dhana Advisory, a consultancy focused on sovereign wealth funds, said the Citigroup experience meant Adia was less likely to make such big single investments in the future.

"This investment was an unusual one for Adia, as they don't usually take such large direct positions in a single company," she said.

ghunter@thenational.ae

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