No, AA's spell checker isn't off this morning, though it may take one more cup of Cafe Najjar to bring all the lights fully on.
Tail is a deliberate choice:
- Barring a miracle or a negotiated settlement with Citi, one is facing a substantial loss beginning next March.
- Another has just exited an from investment in Citibank at a hefty profit. So we are at the tail of the investments.
The first is ADIA who back in November 2007 invested US$7.5 billion in Citibank mandatory convertible bond with an 11% coupon and conversion to take place between US$31.83 to US$37.24. Around the time the deal was struck Citigroup was trading at $32 to $33 per share. ADIA in effect sold Citi a put option (the right to sell Citi shares to ADIA at a fixed price). As well ADIA also gave Citi the first 17% of the upside (the movement in share price from $31.83 to $37.24). ADIA only gets the upside if the share price goes higher when for example say it would get Citi shares trading at $41 for $37.24. An investor would do a deal like this if its expectations for volatility in Citi's stock was low for the option period. Or if it believed that volatility was all one way -- the upside. ADIA recently was cashed out by Citi at the lower $31.83 price. Citi's stock price is roughly US$4.00 now. You can do the math on the impending loss based on market price. Here's an article from The National. Recall AA's earlier post on the AED 1 billion camel.
The second are KIA who bought US$ 3billion (I think Series B 1) from the US$12.5 billion convertible issue in January 2008 - roughly two months after ADIA's investment The conversion price was US$31.62 per share. KIA has recently claimed a profit of US$1.1 billion. Just in time for the interpellation sessions with the Majlis Al Umma. You'll recall that earlier the MPs objected to the investment. They say timing is everything! And that's not just investments but also politics.
Here's the WSJ article on KIA's US$1.1 billion profit.
So what happened?
As you'll recall, Citibank had an exchange offer mid year in connection with an "investment" by the US Government in its stock via the conversion of preferred shares. Other preferred security holders were given the option of joining the deal. In fact it was a condition. Uncle Sam agreed to match US$ for US$ any private sector conversions on these terms. Some background here and here and here. In summary, preferred securities could be exchanged for common shares at US$3.25 per share. Citi was trading at approximately half that price at the time.
ADIA didn't participate in the exchange. KIA did.
For the nominal value of its US$ 3billion of preferred stock, KIA would have gotten 923 million shares. To reach the US$4.1 billion in sales proceeds mentioned in the articles, KIA would have had to sell at higher than the current US$4.06 per share. Or sell something over 1 million shares. Perhaps it had an additional 86.8 million shares from capitalized preferred dividends?
Two questions remain:
- Who bought KIA's stock? At what price?
- Can ADIA renegotiate its deal with Citi? (It's unlikely the Citi's price is going to $31 in four months).
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