No urgency to rescue USA Inc

 

The answer then was that it was both – Adia saw undervalued assets in one of the world’s prime financial brands going cheap, and took its chance. But the fact that the Americans were prepared to sell securities in their biggest bank also spoke eloquently of their need for fresh capital.

 

The news Citi was to raise a further $14.5bn of shares to a variety of foreign investors – from Singapore, the Middle East and some private investors – shows just how desperate the Americans have become. With $10bn of losses in the fourth quarter and write-downs of $18bn, the situation at Citi has deteriorated further in just over a month, to the extent it had to offer slightly different terms to the new investors than it granted Adia.

The Adia deal involved the purchase of equity units paying an 11 per cent yield, but only for the three years of their existence. At that stage, they will become normal equity, bearing whatever dividend yield Citi pays at the time. The deal with the Singaporeans, in contrast, involves the issue of perpetual securities that carry a seven per cent dividend rate – implying Citi is willing to guarantee that yield whatever its financial circumstances three, four or more years from now.

The difference is not big enough for Adia to claim it has been disadvantaged, but it does tell us a lot about the mentality change at Citi. In effect, it has had to promise the Singaporeans and others their investment was virtually risk free, which in turn means Citi is not 100 per cent confident the group will exist in current form in the medium term. This does not mean Citi thinks it is going bust, but it does suggest it will have to transform itself radically over the next couple of years. When an institution the size of Citi makes such an admission, the rest of the world should listen – it means the effects of the sub-prime crisis are only beginning to be felt, and could get worse this year.

We will be better equipped to estimate the extent of the deterioration after Merrill Lynch, the next candidate for foreign capital injection, reveals the terms of its deals. Merrill is looking for help from Korean, Kuwaiti and Japanese investors, and will probably seek up to $7bn on some form of convertible stock. That implies Merrill is taking a slightly more optimistic view than Citi, but until the terms are known we should beware of jumping to conclusions about Merrill’s prospects.

For Middle East investors, the implications are clear. Cash-rich investment institutions have an opportunity to buy a large chunk of USA Inc on favourable terms. And it is not just American assets – several European finance houses, especially those with big US exposures, are also thought to be seeking Middle East investment. But there is no great hurry – my suspicion is that the terms will get even better the longer they wait.