Citigroup is putting the final touches to its second big capital-raising effort in as many months, seeking up to $14bn from Chinese, Kuwaiti and public market investors.
Under the proposal being discussed, the bulk of the money – roughly $9bn – would be most likely to come from China, people familiar with the negotiations say. The Kuwait Investment Authority would contribute about $1bn, while $2bn to $4bn would be raised through a public placement of shares.
The formula is still being adjusted and there could be last-minute changes, the people involved say. It is also possible other investors will participate.
The deal underscores the depth of the problems faced by banks that suffered heavy losses in the US subprime mortgage crisis. It would follow an injection of $7.5bn into Citigroup by the Abu Dhabi Investment Authority in late November.
“The second round is going very well, because Citi is seen as US Inc,” says the regional head of a US investment bank in the Middle East. Citi declined to comment.
As more US financial institutions raise capital from foreign sources, largely from sovereign wealth funds, there is a growing debate about the potential domestic political reaction,
particularly during a presidential election year.
The deal would mark the first time that the KIA has invested in an ailing US financial institution. KIA, which is known as a conservative investor, is taking a portfolio approach to the US financial crisis, looking to acquire small stakes in many troubled financial firms rather than putting a large chunk of money in one bank.
Staff at the KIA could not be reached for comment.
The deal highlights China’s growing importance as an exporter of capital. The Chinese government has emphasised a policy of investing abroad to keep the ample liquidity in China from feeding a bubble in shares and property.
“They want to recycle money as there is too much in China,” says Fred Hu, a China-based managing director at Goldman Sachs. “Because of capital controls, only the government can take the money and put it offshore.”
The most likely Chinese investor in the Citigroup deal is probably a bank such as China Development Bank, which in addition to funding infrastructure projects at home also finances Chinese companies as they expand abroad. The company, which is not listed, also has taken shares in financial institutions such as Barclays.
Another possibility would be an investment arm of the government, although the distinction between government and quasi-private money is often blurred in China.
Other potential Chinese investors include China Investment Corporation, which invests China’s reserves abroad, and recently put $5bn into Morgan Stanley. China’s State Administration of Foreign Exchange also invests directly offshore.
Citi’s capital-raising structure differs from the first round. That involved a complex security that converts into Citi shares with a generous 11 per cent coupon.
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