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

Citigroup Haunts Abu Dhabi as Mubadala 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 (OGXP3) punctured investor confidence in his companies. The Mubadala restructuring comes after sister fund Abu Dhabi Investment Authority lost an appeal this year related to losses on a $7.5 billion investment in Citigroup Inc. (C)

“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, bought the equivalent of 4.9 percent in Citigroup, 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 8th 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.

“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.”

Credit Line

Esteves’s Grupo BTG Pactual (BBTG11) 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’

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 ($1 billion) 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.

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.

ADIA Returns

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.

Abu Dhabi, the biggest of seven emirates in the U.A.E., set up ADIA in 1976 to manage proceeds from its oil wealth. The fund is building up in-house teams in areas such as real estate and private equity as it seeks greater control over 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.

Overseas Investments

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.

To contact the reporter on this story: Stefania Bianchi in Dubai at sbianchi10@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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