Citigroup, Merrill Lynch Get $21 Billion From Outside Investors
By Yalman Onaran
Jan. 15 (Bloomberg) — Citigroup Inc. and Merrill Lynch & Co., two of America’s largest financial institutions, turned to outside investors for a second time in two months to replenish capital eroded by subprime mortgage losses.
Citigroup, the biggest U.S. bank, is getting $14.5 billion from investors, including the governments of Singapore and Kuwait, former Chairman Sanford Weill, and Saudi Prince Alwaleed bin Talal, the New York-based company said today in a statement. Merrill, the largest brokerage, said it’s receiving $6.6 billion from a group led by Tokyo-based Mizuho Financial Group Inc., the Kuwait Investment Authority and the Korean Investment Corp.
Wall Street banks have now received $59 billion, mostly from investors in the Middle East and Asia, to shore up balance sheets battered by more than $100 billion of writedowns from the declining values of mortgage-related assets. Citigroup was propped up in November by a $7.5 billion investment from the Abu Dhabi Investment Authority. New York-based Merrill was helped by a $5.6 billion cash infusion last month from Singapore’s Temasek Holdings Pte. and U.S. fund manager Davis Selected Advisors LP.
“The only reason the banks are raising capital from the Middle East and Asia is because those are the only people who have the excess capital to lend,” said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management, which holds shares of Citigroup and Merrill.
Citigroup declined 68 cents to $28.38 and Merrill fell $1.25 to $54.72 in early New York trading.
The writedowns have reduced Citigroup’s so-called Tier 1 capital ratio, which regulators monitor to assess a bank’s ability to withstand loan losses. With today’s capital increase, the Tier 1 ratio would be 8.2 percent, Citigroup said, keeping it above the company’s 7.5 percent target.
`Capital at a Cost’
Morgan Stanley, UBS AG, Merrill Lynch & Co. and Bear Stearns Cos. also reached out to sovereign wealth funds or state- controlled investment authorities in Asia for money after bad investments depressed profits.
“It does show that investors aren’t completely ignoring the sector,” said Peter Plaut, a senior credit analyst at Sanno Point Capital Management, a hedge fund based in New York. “They are putting in capital but it’s at a cost. Now it’s up to the CEOs to be able to generate returns that exceed that cost of capital.”
The Kuwait Investment Authority, which invested in both Merrill and Citigroup, was formed by the Middle East’s fourth- biggest oil producing country in the 1980s to manage the nation’s wealth. Kuwait may have as much as $250 billion of assets, compared with about $875 billion for the Abu Dhabi Investment Authority, the world’s largest sovereign wealth fund, according to an estimate by Morgan Stanley analyst Stephen Jen.
The Government of Singapore Investment Corp. invested almost $7 billion in Citigroup convertible preferred securities and said in a statement today that it will own about 4 percent of the bank if the securities are turned into shares. With a 4 percent stake, Alwaleed has been Citigroup’s biggest individual shareholder since the early 1990s, when soured investments in commercial real estate left corporate predecessor Citicorp short of capital.
Singapore and Alwaleed, along with Los Angeles-based Capital Group Cos., the biggest U.S. manager of stock and bond mutual funds, Kuwait, the New Jersey Division of Investment and Weill, will receive a 7 percent annual dividend from the investment in Citigroup.
Merrill’s convertible securities will pay a 9 percent annual dividend on the securities until they automatically turn into Merrill shares in 2 3/4 years’ time. The group will get fewer shares if Merrill’s stock price climbs above $61.31 and more if it drops below $52.40, according to the company’s statement.
Foreign investors whose stakes rise about 10 percent trigger a review by the U.S. Committee on Foreign Investment, which examines whether acquisitions by overseas buyers compromise national security.
U.S. Securities and Exchange Commission Chairman Christopher Cox said in December that the growth of state-run investment funds may lead to an increase in political corruption because governments might abuse the funds’ leverage over markets and companies.
While there may be “hand-wringing” in Washington over the investments, there won’t be an attempt to tighten rules on foreign investors, said Todd Malan, executive director of the Organization for International Investment.
“Congress realizes that we need this investment,” said Malan, whose Washington-based group represents 141 non-U.S. companies investing in the country.
The following is a table showing banks and securities firms that have sold stakes to shore up capital. All except Barclays Plc raised the cash after reporting asset writedowns and credit losses amid the collapse of the U.S. subprime mortgage market.
Firm Infusion Investor Stake
Citigroup $6.8 Government of Singapore 3.7%
7.7 Kuwait Investment Authority; not
Alwaleed bin Talal; Capital specified
Research; Capital World;
Sandy Weill; public investors.
7.5 Abu Dhabi Investment
Merrill Lynch 6.6 Korean Investment Corp.; not
Kuwait Investment Authority; specified
Mizuho Financial Group
4.4* Temasek Holdings 9.4%**
1.2 Davis Selected Advisors
UBS 9.7 Government of Singapore
Investment Corp. 10%
1.8 Unidentified Middle Eastern
Morgan Stanley 5 China Investment Corp. 9.9%
Barclays 3 China Development Bank 3.1%
2 Temasek Holdings 2.1%
Canadian Imperial 2.7 Li Ka-Shing; Manulife not
Financial; others specified
Bear Stearns 1 Citic Securities Co. 6%***
* Temasek has an option to invest an additional $600 million.
** Estimate based on purchase price of $48 a share.
*** Citic has an option to increase its stake by as much as