Abu Dhabi’s Investment authority is set to face the consequences of an investment deal that it had made with Citigroup two years ago, early in the financial crisis. Under the deal, the United Arab Emirates’ Sovereign Fund will soon have to s tart purchasing $7.5 billion worth of Citigroup shares at $31.83 a piece, more than 7 times its current trading price of $4.10.
The performance of Abu Dhabi’s investment will ultimately be determined by Citigroup’s stock price when March comes around, but it’s highly unlikely that Citigroup shares will recover the ground that it’s lost.
The news is a major setback for the U.A.E. that announced last week that Dubai World, a state-owned company, needed a standstill on debt repayments, a move that shocked markets around the world.
Abu Dhabi wrote a check for $7.5 billion in exchange for an 11% dividend on its money. Unfortunately for Abu Dhabi, is that it only demanded its dividend payments for a little more than 2 years, until March 15th, 2010. After that date, Abu Dhabi will be exchanging its initial investment into four installments of Citigroup common stock, which was at the time worth nearly $31.00 per share.
In order to make the exchange happen, Citigroup announced a new public bond that will offer to pay a smaller yield of slightly more than 6%. All of the proceeds will go to Abu Dhabi, which will be required to use the cash in March for its overpriced purchase of Citigroup stock.
When making the assessment, Abu Dhabi assumed that Citigroup’s shares would rise slightly over a period of 27 months, but after being hammered by the financial crisis and receiving billions of dollars worth of bailout funds, Citigroup’s stock has dropped to about $4.00 per share.
