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Citigroup Replenishes Its Capital

Steve Goldstein and Greg Morcroft write:

Citigroup gets $7.5 billion infusion from Abu Dhabi investors: Citigroup said it has received a $7.5 billion injection from the Abu Dhabi Investment Authority, a much-needed shot in the arm as the financial-services giant weighs massive job cuts and slashing the value of debt securities on its balance sheet. "This investment, from one of the world's leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business," said Win Bischoff, acting chief executive of the Dow Jones Industrial Average component. Citigroup's shares rose 2% Tuesday morning, adding 59 cents to $30.39. The stock, which had dropped below $30 for the first time in more than five years on Monday, has lost 40% of its value this year.

Citigroup, in a statement issued late Monday, said the "long-term" investor will receive no more than 4.9% of its capital and won't get a seat on the board. This holding would exceed the 3.6% controlled by Prince Alwaleed bin Talal bin Abdul Aziz al Saud of Saudi Arabia. Abu Dhabi is getting bonds that must be converted and will yield 11% annually. They'll convert into stock priced at $31.83 to $37.24 a share, with the conversion to occur between March 2010 and September 2011. Stefan-Michael Stalmann, analyst at Dresdner Kleinwort, said that while the coupon rate of 11% looks high, the after-tax cost of funding is equivalent to Citi's current dividend yield of about 7.25%. Stalmann called the deal "relatively attractive" and said Citi is issuing delayed equity at a premium of 8% to 25% to the current share price -- thus avoiding the discount that a current rights issue would have required. "In exchange for being able to issue equity at a guaranteed premium, Citi only gives up the opportunity to issue straight equity at a higher share price in the future," he said...