Published September 23, 2009

GIC pares Citi stake and nets US$1.6b profit

It has paper gain of another US$1.6b on remaining 4.9% stake

By CONRAD TAN

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(SINGAPORE) The Government of Singapore Investment Corporation (GIC) has sold nearly half its shares in Citigroup for a profit of US$1.6 billion, leaving it with a 4.9 per cent stake in the US bank.

Ng Kok Song, GIC's group chief investment officer, said that GIC is sitting on another US$1.6 billion in paper gains on its remaining Citi shares, based on Citi's closing share price on Monday. That suggests a tidy profit of US$3.2 billion to date - half of it realised - on GIC's original US$6.88 billion investment in Citi, including preferred dividends it has received so far.

By contrast, GIC's investment of 11 billion Swiss francs (S$15.1 billion) in UBS is still showing a paper loss of some 4.6 billion francs, even after including interest payments it is entitled to, BT's calculations show.

In February, GIC agreed to exchange its US$6.88 billion worth of preferred shares in Citi into common shares at US$3.25 each, or about 2.12 billion common shares in total, as part of a sweeping recapitalisation plan by Citi to boost its common equity base.

That share swop was completed on Sept 11, giving GIC a stake of 9.4 per cent in Citi - far more than GIC had intended to hold when it first invested in the bank in January 2008.

Since Sept 11, GIC has sold more than one billion of its Citi shares in the market, equivalent to a 4.5 per cent stake, netting a profit of US$1.6 billion on the sale. Its remaining 4.9 per cent stake in Citi had a valuation profit of US$1.6 billion based on Citi's closing share price of US$4.43 on Monday, Mr Ng said.

GIC, which manages Singapore's foreign reserves, was able to profit on its investment in Citi despite the financial crisis because of precautions that it took when it agreed to pump US$6.88 billion into the bank, Mr Ng said.

'First, we had assessed that, in a crisis, Citi would receive US government assistance because of its systemic importance in the US financial system.

'Second, GIC had invested in the preferred stock, and was protected in the recapitalisation of Citi whereas common stock holders were severely diluted and suffered large losses.'

Indeed, including the annual dividend of 7 per cent, or some US$482 million a year, that GIC had received in quarterly instalments on its preferred shares before the swop, GIC would have profited from the sale of its Citi common shares at any price above US$2.95, Mr Ng said. GIC confirmed that Citi had not missed any of the preferred dividend payments before the conversion took place.

But the share swop also means that GIC no longer enjoys the protection it enjoyed as a preferred shareholder. In particular, GIC is no longer entitled to the preferred dividend of 7 per cent a year, which had to be paid before Citi could distribute any dividends to its ordinary shareholders. It also means that GIC's stake is now vulnerable to dilution if Citi decides to sell new shares.

Citi may be mulling just such a move, as part of a plan to cut the US government's 34 per cent stake in the firm, the Wall Street Journal reported on Sept 16, citing people familiar with the matter.

The plan could involve a joint stock sale, with Citi issuing up to US$5 billion in new shares to the public and the US government selling some of its Citi shares at the same time, the report said. The proceeds from the share sale could then be used to redeem some of the preferred shares in Citi that the US government holds. Any new share issues by Citi would dilute the holdings of existing common shareholders, including GIC.

But GIC appears to be comfortable with its current stake of 4.9 per cent in Citi. 'GIC will continue its investment in Citi as we are confident of its long-term prospects,' it said in a statement yesterday.

Meanwhile, GIC's investment of 11 billion Swiss francs in mandatory convertible notes issued by UBS in March 2008 has taken a much worse battering than its Citi venture, despite various safeguards that were also built into the investment agreement with UBS.

According to UBS's latest annual report, the UBS notes held by GIC must be exchanged for ordinary shares by March 5 next year, giving GIC an estimated 228.83 million shares.

At Monday's closing price of 19.27 francs for UBS shares, those shares would be worth just 4.41 billion francs, or about 6.6 billion francs less than its original investment of 11 billion francs.

Including the two yearly coupons of 9 per cent, or 990 million francs each, that GIC is entitled to over the two-year term of the UBS notes it holds, UBS's share price would have to reach 39.4 francs for GIC to break even on its investment in the bank, based on the current terms of conversion.