Published November 25, 2008

US govt rescue dilutes GIC's Citi stake

However, GIC's rights and dividends from preferred shares still unclear

By CONRAD TAN

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(SINGAPORE) The US government's massive capital injection into Citigroup will dilute the Government of Singapore Investment Corp's earlier investment in the bank, although it was unclear yesterday whether the bailout would trigger any changes in GIC's rights or a cut in the dividend that it receives. When contacted, GIC declined to comment.

GIC, which manages Singapore's foreign reserves, bought US$6.88 billion worth of convertible preferred shares in Citi in January.

GIC said at the time that the preferred shares, if converted to ordinary equity, would increase its stake in Citi to about 4 per cent from an existing 0.3 per cent.

The preferred shares pay quarterly dividends at a rate of 7 per cent a year, and the dividends on the preferred stock must be paid before any dividends can be paid to Citi's ordinary shareholders.

But now that the US government has forced the bank to slash its dividend to ordinary shareholders to no more than one US cent each quarter, it is not clear if the dividend payments to Citi's existing preferred shareholders such as GIC could be reduced.

According to a stock exchange filing by Citi in January describing the preferred shares that it sold to GIC and other investors, 'dividends on shares of the convertible preferred stock will not be mandatory', but if Citi does not pay dividends on the preferred stock, it cannot then pay dividends to its ordinary shareholders.

That agreement also allows Citi to issue additional preferred shares ranking equally with or junior to the shares that it issued GIC and other investors who bought Citi preferred stock at the time, without seeking their consent.

The US government said on Monday that it would insure up to US$306 billion of Citi's troubled assets and inject US$20 billion in capital into the bank.

In exchange for the bailout, Citi will issue US$27 billion worth of preferred shares that pay a quarterly dividend at a rate of 8 per cent a year.

The government will also receive warrants for US$2.7 billion of ordinary shares.

The preferred shares issued to the US government are superior to those that GIC bought in January in at least two respects - the dividend is higher and it is cumulative, which means that any unpaid dividends will accumulate each quarter until they are paid.

The preferred shares that GIC bought are non-cumulative, which means that Citi has no obligation to make good on any missed dividend payments if it chooses not to pay them in a given quarter.