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Citi's General Growth stake tied to Pershing Square
December 4, 2008 / 10:25 PM / 9 years ago

Citi's General Growth stake tied to Pershing Square

<p>A man walks outside a Citibank branch office in Jakarta, November 25, 2008. REUTERS/Crack Palinggi</p>

NEW YORK (Reuters) - Citigroup Inc (C.N) has taken a 5.3 percent stake in General Growth Properties Inc (GGP.N), with most of the position intended to hedge a derivatives trade the bank entered with hedge fund Pershing Square.

Citigroup said in a regulatory filing on Thursday it owns 14,245,462 shares of General Growth, a real estate investment trust (REIT) that is under pressure to refinance $1.035 billion in debt maturing by the end of the year, and another $3.07 billion maturing next year.

In a filing earlier in the week, Morgan Stanley (MS.N) reported that it took a 5.1 percent stake in Chicago-based General Growth.

General Growth’s shares rallied 25 cents, or 19 percent, to close at $1.60 on Thursday after Citigroup reported its big stake.

Both Citigroup and Morgan Stanley primarily bought shares to reduce their risk in trades they entered with Pershing Square Capital Management, said William Ackman, the fund’s founder.

The derivatives trades gave Pershing Square exposure to shares without owning them outright, so the banks essentially bought the stock on behalf of Pershing Square. In a November filing, the fund said it owned about 7.5 percent of General Growth’s shares outright.

The derivatives transactions with Morgan Stanley and Citigroup, and a similar deal with UBS AG UBSN.VX, use a derivative known as a “total return swap” that give the fund exposure to another 12.5 percent of General Growth’s shares.

In the total return swap, Pershing Square pays financing fees to the banks. If the shares go up, the fund receives the gains, but if shares go down, it assumes the loss.

Spokesmen for Citigroup and Morgan Stanley declined to comment, while a UBS spokesman was not immediately available.

Pershing Square could not buy more than 9.9 percent of General Growth’s shares outright without falling afoul of special share ownership rules that REITS typically follow to maintain their special tax-advantaged status.

General Growth, which owns more than 200 shopping malls in 44 states, has $21.9 billion in debt maturing by the end of 2012.

Last month, General Growth confirmed it hired law firm Sidley Austin as bankruptcy counsel and said it may need to seek bankruptcy protection if it cannot meet its debt maturities this year and next.

General Growth shares have lost more than 96 percent of their value since the start of the year.

Reporting by Ilaina Jonas and Dan Wilchins; editing by Andre Grenon, Gary Hill and Jeffrey Benkoe

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