Abu Adhabi To The Rescue Of Citibank

Citi had to raise $7.5 BILLION of quick cash so they borrowed it from the MIDDLE EAST! This is the biggest bank in the united states that :

1) Needed $7.5 BILLION of emergency cash
2) Couldn't get it from any other bank in the states or the Federal Reserve
3) Diluted their common stock shares without identifying WHY they were doing this

Based on the implied cost of capital to Citicorp of the $7.5 billion dollar investment by Abu Dhabi, the implication is that Citicorp may be on the verge of insolvency. The deal is structured as a passive, subordinated convertible security with an 11% dividend and is convertible into 4.9% of the Company, based on a price conversion scale that ranges from $31.83 to $37.24 and the conversion expires in Sept 2011. Without further details on the conversion feature, and keeping the analysis "plain vanilla" for these purposes (i.e. we don't have all the terms of the deal and there's some theoretical "nuances" to consider) I'm assuming the average conversion price would be $34.53. And assume Citicorp stock performs such that it is worthwhile for Abu Dhabi to convert into common (i.e. the stock rises above the conversion range by 2011 and I doubt Abu Dhabi would do this if they didn't believe in that event). Based on yesterday's closing price of $30.70, th e implied cost of capital to Citicorp on the conversion feature is 12.5%, plus they've paid out an 11% dividend. That's an all-in cost of capital of 23.5%.

Now, just on the surface, the 11% dividend is similar to the yield that a mid-quality junk bond issuer would have to pay to get bond deal done. But the 23.5% implied cost of capital embedded in this deal reflects the kind of return that would be required for a "vulture" investor to invest in a highly distressed company. In other words, the cost of capital to Citicorp's shareholders of this deal implies that the rate of return required to induce investment capital into the Company reflects an assessment by the market that Citi is on the verge of insolvency. I would be interested to know if the good folks in Abu Dhabi were allowed to see the real "insider" financials at Citi, including ALL of the off-balance-sheet financing structures AND all of the derivatives.
While the popular press is heralding this as a "lifeline from a Middle Eastern nation," I see it as a sign of significant distress at Citigroup. Unless I am missing something, an 11% yield is what one would expect from something in the high risk or "junk" category. To me, this suggests that Citigroup is desperate for new capital.