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Thursday, November 29, 2007

* What's Up With Citi's (C) Payday Loan?

Earlier this week it was reported in Bloomburg that Citigroup will receive $7.5 billion cash from the state-owned Abu Dhabi Investment Authority (ADIA) to prop up its capital base after record mortgage losses wiped out almost half its market value. Initially this looked like a good thing. However, I found this quote a little disturbing:

Abu Dhabi will buy securities that convert to stock and yield 11 percent a year, almost double the interest Citigroup offers bond investors, underscoring the New York-based company's need for cash.

Yield 11% per year? That is nearly double the current dividend yield. This sounds like a desperation payday loan to me. Yet another disturbing quote was:
The Citigroup equity units that ADIA will purchase can be swapped for as many as 235.6 million shares starting in 2010. The securities will convert into Citigroup shares at prices ranging from $31.83 to $37.24 between March 15, 2010, and Sept. 15, 2011.

In effect ADIA has locked in today's price for the debt's conversion in 3-4 years. As a shareholder, I would liked to have had the same offer -- 11% for 3-4 years with the opportunity to purchase stock at a historically low price.

I had a stop-loss go off a few weeks ago and sold my C holdings in my after-tax account. Since then then, I have been looking for a reentry point, but based on the above I will sit on the sidelines a little longer to see what unfolds.

Full Disclosure: At the time of this writing, I own shares of C in my IRA.


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