March 2, 2017

Investing lessons from a prince

...Citibank had a precarious balance sheet, with a few billion of loan-loss reserves mainly on Third World debt. They were being criticised for their real estate assets and on the capital front. The bank desperately needed capital as the Federal Reserve urged it to strengthen its capital base after it lost significant sums on property loans. Moody's had downgraded Citi preferred stock to a speculative "junk" rating and many began to wonder if the bank would fold up.

At the end of 1990, Prince Alwaleed quietly bought 4.9% of Citicorp's existing common shares for $207 million ($12.46 per share) on the open market. Once the management noticed him and approached him for further investments, he played his cards shrewdly.

In February 1991, he bought new preferred shares, amounting to $590 million, amounting to a further 10% of Citicorp and taking his stake to 14.9%. These preferred shares were convertible into common shares at $16 each. In addition to an 11% dividend on the new issue of convertible preferred stock, he would earn a profit if the common stock rose above $16 a share.

Early March, Citicorp's capital crisis passed when a group of investors bought a further $600 million of new preferred shares. The stock price began to climb. Dividend payments resumed. Citi came back from the precipice and had recovered from its crisis. In 1998, Citicorp merged with Travelers Group to create Citigroup. Prince Alwaleed made insane amounts of money on his contrarian bet.


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