With private equity out of the game, sovereign wealth funds are starting to flex their muscles around the world. and Dubai's indicated a hunger for situations in the US and Asia.
Dubai International Capital yesterday bought a small stake in Sony, but the big deal was the bail out of Citigroup by the state-owned Abu Dhabi Investment Authority in a $US7.5 billion deal.
The Citi deal with the ADIC came 12 hours after the move on Sony by the smaller DIC and overshadows the importance of it and other recent deals by the newly emerging sovereign wealth funds of the Middle East.
Citigroup made its announcement late Monday night, well after trading has finished in the US and while trading was active in Asia.
The news saw the yen stop rising, putting an end to a sharp sell off on Asian markets, including Australian and injected optimism into Europe and the US.
The interest rate on the $US7.5 billion of new capital was the giveaway as to the desperation involved: 11% a year, more than twice the rate a highly-rated US bank in good condition would have paid.
Citi was forced to pay more than 9% several weeks ago in a note offering, which was the highest it had paid for years, but this 11% rate takes it to a new level.
The high cost of the new funds highlights Citi's determination to make sure its depleted capital doesn't fall any further, especially its Tier one capital.
Citigroup said three weeks ago when chairman and CEO, Charles Prince departed, that it faced between $US8 and $US 11 billion in additional write-downs and provisions on dodgy subprime mortgages and associated credit securities.
This will help it meet those write downs and maintain its 7% dividend to shareholders.
The shares rebounded on the latest news to trade above $US30.
Citigroup has already written off around $US6 billion and has an estimated 50% of its net capital exposed to the subprime mess.
Win Bischoff, the bank's acting chief executive, said the investment from "one of the world's leading and most sophisticated equity investors" would allow Citi to pursue attractive opportunities to grow its business.
Sheikh Ahmed Bin Zayed Al Nahayan, ADIA's managing director, said in a statement that Citi had a unique position in the financial markets throughout the world. "We see in Citi a highly respected company with a premier brand and with tremendous opportunities for growth. This investment reflects our confidence in Citi's potential to build shareholder value."
The impact of credit market turmoil combined with a previous string of acquisitions, including the Nikko Cordial stockbroking firm in Japan, has left Citi's balance sheet under strain.
Tier One capital ratio fell to 7.3% at the end of the third quarter, below Citi's target of 7.5%, and has fallen further since.
The company's shares fell below $US30 to $US29.76 on Wall Street Monday afternoon in gloomy trading after the Fed moved to pump in $US8 billion to try an ease a credit freeze that looks like extending into January.
More worryingly, the Fed moved to make it easier for market participants to borrow Treasury securities from it, something it didn't need to do when the credit crunch hit in August.
Citigroup has committed itself to returning the Tier one ratio to its target by the end of June. The issue of what it called 'mandatory convertible securities to ADIA would lift that ratio by about half a per cent.
The 11% rate is largely tax deductible so it is a slight premium to the yield on Citi's shares of over 7% at the moment.
Mr Bischoff said the investment would enable Citi to access capital in "an efficient manner" and was consistent with its strategy of maintaining a balance sheet that benefits from highly diverse sources of funding in terms of both geography and type of security.
He added that ADIA is a significant participant in alternative investments and emerging markets financial services, two areas in which Citi has major positions and has been expanding.
ADIA's investment will convert during 2010 and 2011 into ordinary shares at the equivalent of $US31.83 to $US37.24 per share. In addition to its small current holding, this would give ADIA a stake of less than 5 %, but no board representation.
In July, ADIA bought a large stake in Apollo Asset Management, a US private equity group.
It's not the first time Citigroup has been rescued by a Mid East investor: Prince Alwaleed bin Talal, the Saudi billionaire, bought a strategic stake when it was struggling in 1991. He remains a shareholder and an active one at that.
That means around 10% of America;s biggest bank is controlled in the Middle East by big oil producers.
(And co-incidentally Saudi Arabia announced today that it was lifting oil output, which sank oil prices by $US2 a barrel.)
ADIA will have no special rights of ownership or control and no role in the management or governance of Citi. It will have no right to any seats on Citi's board.
This deal was ticked off by the US banking regulators, led by the Fed and some powerful critics of banks in the US Congress also approved. It's a big deal and shows how desperate Citi's position is.
