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US govt could own up to 36% of Citigroup

(Agencies)
Updated: 2009-02-27 23:08

NEW YORK -- The US government will exchange up to $25 billion in emergency bailout money it provided Citigroup Inc. for as much as a 36 percent equity stake in the struggling bank.

Citigroup Center is seen in New York, Monday, February 23, 2009. [Agencies]

The deal announced Friday, the third attempt at a rescue plan for Citigroup in the past five months, is contingent on private investors also agreeing to a similar swap.

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The aim is to keep the New York bank holding company alive and bolster its capital as it faces growing losses amid the intensifying global recession. Existing shareholders would see their ownership stake shrink to as litte as 26 percent and the bank said it is eliminating all dividends on common shares.

Investors appeared disappointed in the deal and expected dilution of their stake, sending shares plummeting 94 cents, or 32.8 percent, to $1.56 in premarket trading. The news also dragged down stock futures ahead of Friday's market opening.

Underscoring its precarious nature, the company also disclosed that it recorded a goodwill impairment charge of about $9.6 billion due to deterioration in the financial markets.

The Treasury Department, which has provided a total of $45 billion to Citi, said the transaction requires no new federal funds. But it left the door open for Citigroup to seek additional government funding or for the conversion to common shares of the remaining $20 billion in federal bailout money it received late last year. The government currently holds about an 8 percent stake in Citi.

For now, that $20 billion in government funding will be converted into a new class of preferred shares that will be senior to other bank debt and it will continue to pay a yearly 8 percent cash dividend. As part of the deal, the payout for all other preferred shares will be suspended.

Citi will offer to exchange up to $27.5 billion of its existing preferred stock held by private investors at a conversion price of $3.25 per share. That's a 32 percent premium over Thursday's closing price of $2.46.

The Government of Singapore Investment Corp., Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors are among the private investors that said they would participate in the exchange.

The conversion will help provide Citi the mix of capital to withstand further weakening in the economy. The stock-conversion option was laid out by the Obama administration earlier this week as an option for providing relief to banks. It gives the government greater flexibility in dealing with ailing banks. It also gives the government voting shares, and therefore more say in a bank's operations.

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