To GIC: If you can buy CHEAPER, why...oh, why do you choose to pay MORE?

No, really. I just don't get it. By choosing to convert its convertible preferred nots in Citigroup to common stock, GIC would pay 32% premium--more expensive!--compared to its other option to just buy the shares in open market.

The Government of Singapore Investment Corp (GIC) has said it will convert its convertible preferred notes in the US lender Citigroup to common stock in a bid to help shore up the troubled US lender.

The exchange price is US$3.25 a share – a 32 per cent premium to Citigroup's closing price on Thursday. The price is way under the conversion price of US$26.35 a share under the original terms of the investment.

With the conversion, GIC's stake in Citigroup will rise to an estimated 11.1 per cent, without any injection of additional funds.

In January 2008, the Singapore sovereign wealth fund bought about US$6.88 billion worth of perpetual, convertible notes in Citigroup. These preferred stocks would pay a 7 per cent annual dividend.

Preferred shares are similar to bonds in that holders receive a fixed dividend. By getting preferred shareholders like GIC to convert their holdings into common stock, Citi will be able to reduce its quarterly dividend payment.

The US Treasury Department has said it will convert part of its holdings of preferred shares into Citigroup common stock. So too will some other large preferred stockholders, including Saudi Arabia's Prince Alwaleed Bin Talal Abdulaziz Alsaud.

In a statement, GIC said it supports the initiative by Citigroup and the US government to strengthen the quality of the bank's capital base in view of the challenging economic environment.

The US government will now take a US$25 billion stake in troubled Citigroup, with the conversion of its preferential stock into ordinary shares.

Separately, Citigroup has announced it will record another US$10 billion worth of writedowns as part of its already-released fourth quarter results. This brings its net loss for the year to US$27.7 billion.

From Channel NewsAsia, "GIC converts preferred notes in Citigroup to common shares".

In another news (Source: UK. Reuters.com, "UPDATE 1-Singapore GIC converts Citi notes, pays $3.25/shr"), an analyst at an investment bank, who declined to be indentified was quoted to say: "It now means GIC are in the real danger zone. Equity holders are the first to absorb any losses. Or if the Treasury decides to inject more capital, they will get diluted,"