Citi Haunts Abu Dhabi as Fund Caught in Brazil Meltdown

Mubadala Development Co., the Abu Dhabi sovereign wealth fund, is fighting to avoid losses on its $2 billion investment in Eike Batista’s companies as the former billionaire seeks to save his commodity empire from collapse.

The fund is owed $1.5 billion after converting a preferred equity investment in Batista’s EBX Group Co. into debt, three people with knowledge of the matter said last month. That amount is secured by Batista assets, one of the people said, asking not to be named as details are private. EBX also last month agreed to “redeem” a portion of Mubadala’s original investment.

The fund joins creditors such as billionaire Andre Esteves and Brazilian development bank BNDES seeking to recover funds after missed production targets at Batista’s oil company OGX Petroleo & Gas Participacoes SA punctured investor confidence in his companies. The Mubadala restructuring comes after another fund, Abu Dhabi Investment Authority, lost an appeal this year related to losses on a $7.5 billion investment in Citigroup Inc.

“Mubadala may need to wait longer to get its money,” Amol Shitole, a credit analyst with SJS Markets Ltd. in Bangalore, India, said in a telephone interview. “The EBX group companies will need to go through a debt restructuring process.”

The Abu Dhabi Investment Authority, known as ADIA, agreed to buy the equivalent of 4.9 percent of Citigroup in 2007, before share issuances during the financial crisis eroded the value of its holdings. It is also among investors in the Norwegian gas network contesting government plans to cut transport tariffs by 90 percent.

‘Preferred Equity’

The original deal with Batista gave Mubadala “certain rights and protections,” the companies said at the time, without giving more details. EBX last month said it reached an agreement with Mubadala to protect its remaining investment. The wealth fund may be interested in other Batista assets after the slump, it said in a separate response to questions on July 25.

“The agreement we now have with EBX improves security on the remainder of our investment and EBX today remains current,” Brian Lott, a Mubadala spokesman, said in an e-mailed response to questions from Bloomberg. “It’s always been our expectation that EBX will fulfill its obligations to Mubadala.”

The March 2012 deal valued Batista’s empire at $35.5 billion, including publicly traded and closely held units, and he was rated at the time as the world’s eighth richest man. The entrepreneur, who boasted of overtaking Carlos Slim as the world’s wealthiest individual, is now worth an estimated $100 million, according to the Bloomberg Billionaires Index.

In an opinion piece for Brazil’s Valor Economico newspaper last month, Batista vowed to pay ‘every cent’ of his debts.

Credit Line

“The Batista investment had strong political and strategic dimensions,” Geoffrey Wood, a professor of international business at Warwick Business School in the U.K., said by telephone. “There still might be some value in the assets in Brazil and now Abu Dhabi has got a strategic holding there.”

Esteves’s Grupo BTG Pactual gave EBX a $1 billion liquidity line in March, a person with direct knowledge of the accord said at the time. The bank and EBX announced a so-called strategic co-operation agreement that month that included financial advisory, lines of credit and future long-term capital investments in projects, with Esteves leading a strategic and financial management committee, they said in a statement.

The credit line was later canceled, a person familiar with the matter said last month. A BTG spokeswoman, who asked not to be identified under corporate policy, declined to comment. EBX didn’t immediately return an e-mail seeking comment.

‘Landmark Deal’

A group of investors hired Marcio Lobo, a corporate lawyer at law firm Jorge Lobo, to investigate Batista, OGX and three of its former directors, the Financial Times reported on Aug. 4, citing Lobo. The group includes about 60 of OGX’s minority investors, who say they have collectively lost 70 million reais ($30.4 million).

Batista championed last year’s agreement with Mubadala as a “landmark” deal in which the fund would invest $2 billion in return for a 5.63 percent preferred equity interest in his main offshore holding companies, without giving more details.

The entrepreneur also pledged his personal wealth to back 2.3 billion reais in loans from development bank BNDES last year, according to a bank statement last month.

ADIA invested in Citigroup in November 2007, just after the bank had fired chief executive officer Charles “Chuck” O. Prince. A year later, the bank was bailed out at the cost of $45 billion.

Citigroup fell 1 percent to $52.37 as of 9:40 a.m. in New York and has gained about 32 percent this year.

Fund Complaint

The fund bought so-called equity units in Citigroup, a type of convertible bond that paid a fixed annual rate of 11 percent and which converted into ordinary shares in a staggered way between March 2010 and September 2011. Before the conversion the wealth fund received about $2.5 billion in coupon payments.

ADIA, which doesn’t give the value of its assets, filed a complaint against Citigroup in 2009, saying it made “fraudulent misrepresentations” about the deal. Earlier this year, a Manhattan federal judge rejected a bid by ADIA to overturn an arbitration panel’s ruling favoring Citigroup in the dispute.

Erik Portanger, a spokesman at ADIA in Abu Dhabi, declined to comment on the lawsuit or the level of losses. A spokesman for Citigroup who asked not to be identified declined to comment. An EBX spokeswoman also declined to comment.

ADIA generated annualized returns of 7.6 percent over the past two decades and 8.2 percent for the past three, according to its annual report. The fund also invests in small cap equities, fixed income, infrastructure, hedge funds and private equity, developed and emerging market equities.

Other Investments

The fund, which doesn’t invest in the U.A.E. or typically in the Gulf Arab region, had assets valued at $328 billion at the end of 2008, according to economists at New York-based Council on Foreign Relations, the latest available data.

To be sure, the emirate has also gained from some overseas investments. Sheikh Mansour bin Zayed al-Nahyan, who helped shore up Barclays Plc’s balance sheet during the financial crisis and sold his shares as of June 20, could have made as much as 685 million pounds ($1.05 billion) based on June 20’s closing price of 288.1 pence a shares and a warrant price of 197.8 pence.

Mubadala’s GlobalFoundries Inc. chip manufacturer is investing $4.4 billion this year to expand production.

Mubadala, which has about 203 billion dirhams in assets, will “continue to seek out new regional and international opportunities to help realize Abu Dhabi’s ambition of a diversified, globally integrated and innovation driven economy,” the company said in April.

Abu Dhabi’s non-oil industries grew 7.7 percent in 2012 to 325 billion dirhams ($89 billion), the most since 2007, and make up about 48 percent of gross domestic product at constant prices, preliminary government data on June 19 show.

The emirate’s 678 billion-dirham economy accounts for more than half the U.A.E.’s 1.03 trillion-dirham GDP and more than double Dubai’s. Abu Dhabi expanded 5.6 percent in 2012 compared with 4.4 percent in Dubai, according to government data.

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