By now, you've probably heard about Citigroup's (NYSE:C) subprime exposure and the potential impact it could have on the bank's earnings going forward. However, not all is doom and gloom.

The company is set to receive a major capital infusion, which should prove to be a net positive for the company and its shareholders.

The Terms of the Deal
In case you missed it among the flurry of bad news that has beset the company over the last few months, on Monday November 26 it was reported that the Abu Dhabi Investment Authority (ADIA) will invest $7.5 billion in Citigroup. That equates to about 4.9% of the company. It is expected that Citigroup will use this money to shore up its balance sheet and to weather the lingering financial storm.

In return for its investment, the ADIA will receive equity units that will pay an annual yield of 11%. The units convert to common shares at prices ranging from $31.83 to $37.24 a share. I think the fact that Abu Dhabi, which is the one of wealthiest places in the Middle East, is investing this kind of money in Citigroup is a signal that it thinks Citigroup will survive and ultimately thrive.

Another great sign is that this investment comes without any overt board strings. The ADIA will reportedly not have any special rights of ownership or the ability to designate a member of the board. The motivation seems to be Citi's investment merit and not a desire to break up the company or to influence corporate governance issues. (For more details on the deal, see "Citi to Sell &7.5 Billion of Equity Units to the Abu Dhabi Investment Authority".)

The Downside
You'll note in my first paragraph that I said that I think the investment will be a net positive. There could be some downside. While it has been reported that ADIA will not have special rights, with such a large stake in the company I think that it will almost certainly be on management's speed dial, and that ADIA's opinions on certain matters will probably count for something.

The other downside as I see it is what's to stop the ADIA from shorting the stock (like some convertible bond holders may do) in order to capture the 11% rate of return with minimal risk? (To learn more about short selling, see Short Selling Tutorial.)

Now, perhaps such action has been touched upon behind the scenes and barred, or the ADIA has no plans to do this, or it can't do it. However, if ADIA did so, I suspect it could artificially hold down the stock. And so I must at least ask the question and throw that possibility at out there.

Bottom Line
While Citigroup has been besieged with bad news, I think the recent investment by the ADIA is a positive that should provide the company with financial flexibility. Abu Dhabi Investment Authority's apparent willingness to invest in the bank for the long-term it is a good sign that it thinks Citi has a viable future.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Stock Analysis

    Investors Need to Stop Shorting GoPro. Here's Why

    Discover why investors should stop shorting GoPro. GoPro has been one of the fastest-growing companies since 2005 with many betting against more growth.
  10. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Bear Closing

    Purchasing a security, currency, or commodity in order to close ...
  3. Crowded Short

    A trade on the short side with an overwhelmingly large number ...
  4. Gross Exposure

    The absolute level of a fund's investments.
  5. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  6. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!