Washington: The US government will boost its control over Citigroup under a deal to convert up to $25 billion in government-held preferred shares in the bank to common equity, a person familiar with the deal said on Friday.
Under the deal to bolster the bank’s capital base, Citigroup will receive no new government funds and must find private investors willing to convert their preferred stock to common shares, the person said.
The US Treasury would then match the private conversions dollar-for-dollar up to $25 billion. It currently holds about $45 billion worth of preferred stock purchased through two separate capital injections last year.
The size of the government stake ultimately depends on the amount of privately held preferred stock that is converted, the person said. The government was likely to wind up with around 30-40% of Citigroup’s common stock.
The deal, expected to be formally announced later on Friday, also includes a shake-up of Citigroup’s board, with a majority of directors being replaced, but Chief Executive Vikram Pandit will keep his job, the person said.
The action, which marks the third major Treasury intervention to aid Citigroup since mid-October, follows more than a week of negotiations between the Treasury and the firm, once the world’s largest financial services group.
The increase in Citigroup’s common equity is expected to boost its tangible equity capital ratios, making it better able to withstand losses.
The government is expected to receive a slight discount on its conversion price compared to private investors, the person familiar with the deal said. But taxpayers will be giving up dividends of up to 8% on preferred shares that are converted.
It was unclear to what extent Citigroup’s major private preferred stock investors were willing to do the same.
Jennifer Lewis, spokeswoman for The Government of Singapore Investment Corp (GIC), declined comment on the arrangement.
In January 2008, the Singapore fund bought about $6.88 billion worth of perpetual, convertible notes in Citi that pay a 7% annual dividend.
A banking source in Singapore said the US government deal would put pressure on GIC to convert these securities.
Abu Dhabi Investment Authority (ADIA), the world’s largest sovereign wealth fund, bought $7.5 billion worth of Citi notes in November 2007, convertible into not more than 4.9% of Citi shares at that time.
Citigroup shares closed at $2.46 on Thursday, missing out on a rally in other major US bank shares this week as some investors feared its talks with the government would lead to outright nationalization.
Markets in Asia showed little reaction to the Citigroup news on Friday, with US stock futures maintaining their slight gains for the day and Asian shares edging lower.
The dollar was weaker against the Japanese yen as investors booked profits from recent gains in the US currency.
President Barack Obama’s administration signaled broad support for banks this week, with a fiscal 2010 budget plan that includes a “placeholder” provision for the Treasury to purchase $750 billion more in securities from the banking sector.
On Wednesday, the US Treasury pledged to provide sufficient capital to about 20 of the largest US banks that undergo a “stress test” program to assess their ability to cope with the possibility of a worse-than-expected recession.
Citigroup will still be subjected to the stress test despite the conversion transaction, the source said.
Banks judged to need more capital will have six months to raise funds from private investors or accept the Treasury’s offer of buying preferred shares that are convertible into common equity.
And the Treasury will also allow other banks that previously received capital injections under the $700 billion bailout program to convert those preferred stock investments to convertible preferred shares and later to common equity to help boost capital ratios.