Citi takes hit on Goodman blockA A$1.9bn (US$1.23bn) block trade in Australian industrial property giant Goodman Group looks likely to have left sole bookrunner Citigroup with heavy losses that almost cancel out everything it has earned in Australian investment banking this year. Sovereign wealth fund China Investment Corp invited six banks to bid for a block of 50.4m shares, or 2.6% of outstanding, on Tuesday after the close. Citi, with a price of A$37.55, equivalent to a very tight discount of 1.5% to the close of A$38.12, outbid competitors and underwrote the trade. The US bank marketed the shares to investors at A$37.55–$37.60 each, a 1.4%–1.5% discount. The discount discouraged investors from joining the transaction, especially after this year's 51% rise in Goodman’s share price as of Tuesday. The company is shifting its business focus from warehouses to data centres, one of the most sought-after sectors among investors. “Goodman is a good company but the discount is just too tight,” said a hedge fund manager who did not participate in the transaction. Met by the muted response, Citi late on Tuesday reoffered the deal to investors at A$36.85 each, a 3.3% discount. However, exchange data showed no shares were crossed at that level, and the bank had to cut the price further. Data on the Australian Securities Exchange on Wednesday showed that a smaller block of 23.4m shares changed hands at A$36.40 each, a 4.5% discount. It is understood that Citi was the seller of the A$852m block. At that price, the bank would have made a loss of A$27m. On Friday, exchange data showed another block of 22.55m shares was crossed at A$35.35 each, a 5.9% discount to the underwritten price to raise A$797m. At that price, the bank would have made another loss of A$50m, taking the total to A$77m. That implies Citi is left with 4.45m shares after the two sales. Goodman’s shares rose 0.9% to A$36.57 on Friday, meaning the bank is sitting on a paper loss of A$4.4m, in addition to the losses on the reoffered portion, according to IFR calculations. Citi declined to comment. Hit to revenue While the Goodman block put Citi at the top of Australia’s equity capital market league table, from seventh beforehand, the loss the bank suffered from the trade almost matches its investment banking revenue from the country this year. The A$77m loss on the trade is just shy of US$50m. Citi earned US$54m in investment banking fees in Australia in the first 11 months of this year, according to LSEG data. “It’s hard to understand why a bank would want to take such risk, especially at the end of the year. There is no time left to make up the losses,” said a banker away from the deal. According to people familiar with the situation, as the deal was bid through a competitive auction, CIC did not pay a fee. The winning bookrunner was supposed to make money from the difference between the price at which it underwrote the trade and the price it sold the shares to investors. Citi also charged investors a commission of 15bp, according to a term sheet. Assuming both sales charged the same commission, the bank would have pocketed A$2.5m. The move to underwrite a deal of such size at a tight discount also raised some eyebrows as it is uncharacteristic for the bank to commit its balance sheet in Australia for what looks like a league table trade. “They may just have read the market incorrectly but this doesn’t look very Citi. They have a small team in Australia which focuses more on profitability than league table,” said another banker away from the deal. “For a trade of such size and risk, you will need approval from global heads to take it forward,” he said.
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