Abu Dhabi reviewing Citigroup investment: sources

By Stanley Carvalho

ABU DHABI (Reuters) - Abu Dhabi is assessing its $7.5 billion investment in Citigroup as the bank's problems deepen and consequences of a possible nationalization become clearer, according to sources close to the Abu Dhabi Investment Authority (ADIA).

ADIA invested $7.5 billon last year in Citi through convertible bonds that pay 11 percent in interest, but it must start converting the bonds into 235.6 million shares in Citigroup from March next year.

"Nothing has changed from ADIA's perspective at this point. ADIA's convertible bonds are due for conversion in a phased manner between March 2010 and September 2011, and that stands," an Abu Dhabi government official told Reuters.

"But it is carefully assessing its options due to the latest events -- although no decision is taken yet," he said, declining to be named.

A spokesman for ADIA, thought to be the world's largest sovereign fund, declined to comment.

Abu Dhabi is the wealthiest of seven emirates within the United Arab Emirates, the world's fifth-largest petroleum exporter.

ADIA's returns as a bondholder have been unaffected by continuing troubles at Citigroup, but the dramatic fall in Citi's share price has eroded the conversion value of the mandatory convertible bonds.

In the original deal with ADIA, the Citi securities must be converted into common stock at a price between $31.83 and $37.24 a share between March 2010 and September 2011. Citi last traded at $1.50 a share.

Options for the investment include holding them through to the conversion, which may allow enough time for the share price to recover, or converting them early, in a move that may head off the possibility of the U.S. government nationalizing it.

"We know ADIA is following the recent developments closely, but as a bondholder, ADIA's investments are secure because the U.S. government has left bond holders untouched, unlike other investors such as preferred shareholders," a senior Abu Dhabi-based banker close to ADIA said.

"However, it is early days, and we need to wait and see what ramifications the latest events would have and whether there would be pressure on investors in bonds to convert (early)," he said.

Citi, he said, has been urging preferred shareholders and convertible bond holders to convert to common stock to help avoid nationalization by the U.S. government.

FORCED CONVERSION?

On Friday, the U.S. government announced it would convert up to $25 billion of its $45 billion worth of preferred stock into common equity at $3.25 per share.

Other preferred shareholders, including the Government of Singapore Investment Corporation and Saudi Arabia's Prince Alwaleed, will convert up to $27.5 billion of their holdings at the same price.