Comments on Snook’s TR article

I refer to the 13 May 2013 TR Emeritus article “Kok Ah Snook: Not true that GIC lost money in UBS & Citigroup”.

Snook’s claim that GIC invested CHF 14 billion in UBS at the height of the financial crisis is incorrect. Instead, GIC invested CHF 11 billion in UBS or SGD 14 billion [1].

Snook’s claim that GIC’s UBS investment paid 10% coupon interest per annum for 2 years is also incorrect. The coupon rate should be 9% instead [2].

Snook’s claim that GIC was the only one brave enough to catch a falling knife by going into UBS when the crisis was raging is again incorrect. An unidentified Middle East investor went into UBS at the same time as GIC did in December 2007 [3].

Snook’s claim that the difference between UBS and Citigroup is in timing is also incorrect. GIC went into UBS and Citigroup in Dec 2007 and Jan 2008 [4] respectively which is merely a month apart and hardly any different in timing. Snook’s claim that unlike in the case of UBS, GIC went into Citigroup when things were bottoming out is also incorrect. The chart below shows that GIC also went into Citigroup roughly in the middle of Citigroup’s share price plunge and it wasn’t until around Mar 2009 or more than a year later that Citigroup shares bottomed out.

Citigroup

The difference between UBS and Citigroup was that UBS’ offer to GIC was in the form of mandatory convertible notes whereas Citigroup’s offer was in the form of perpetual convertible notes [5]. It was therefore mandatory for GIC to convert its UBS notes to shares at the agreed price of CHF 47.7 when the notes matured after two years despite the price being no good. On the other hand, GIC could hold on to its Citigroup notes in perpetuity receiving 7% per annum which wasn’t bad as long as Citigroup didn’t go bankrupt. Therefore, Citigroup had to re-offer a much better conversion rate of US$ 3.25 per share compared to the originally agreed US$ 26.35 per share. So the difference is that the Swiss cut better deals for themselves than do the Americans.

Snook concluded that the final outcome of GIC’s UBS investment is still unknown since GIC continues to hold on to its UBS shares and that the losses are merely unrealised paper losses. However, there is a saying that profit is made when you buy, not when you sell and another about buying low, selling high. The chart below shows that GIC converted its UBS notes to shares at a relatively high price of CHF 47.7, effectively buying UBS shares at CHF 47.7. Buying at such a high price limits GIC’s potential upside gains. Considering the 9% coupon GIC received in the first two years (ignoring time value of money), GIC paid a net price of CHF 39.1 per share for its UBS shares. GIC could have bought UBS shares at between CHF 10 and CHF 20 any time over the last four years. Instead, GIC spent an additional CHF 19.1 to CHF 29.1 per share to buy those same shares. The additional money spent translates to between CHF 4.4 billion to CHF 6.7 billion for the 230.7 million UBS shares that GIC owns. This CHF 4.4 billion to CHF 6.7 billion represents a tremendous additional cost of acquiring UBS shares that could have been invested elsewhere or used to acquire even more UBS shares. Whatever is the outcome of GIC’s UBS investment when it cashes out 20, 30 years later, it would always be CHF 4.4 billion to CHF 6.7 billion poorer than if it had bought at a low price any time in the last four years.

UBS

If GIC’s Citigroup purchase had been in the form of mandatory convertible notes, it would have been forced to convert its Citigroup notes to shares at a much higher price of US$ 26.35 per share effectively suffering the same fate as its UBS notes purchase.

Finally, Snook failed to consider the time value of money when he said that GIC can fully recover its UBS investment if its UBS shares go back to US$ 8 million. If GIC’s UBS shares climb back to US$ 8 million after 20 years, GIC would have lost 20 years of interest earnings or alternative investment returns. To account for time value of money, GIC’s UBS investment should at least match GIC’s 20-year annualised nominal return of 6.8% since Mr Lee Kuan Yew said GIC plans to hold on to UBS stock for two or three decades [6]. That means UBS shares have to go up to US$ 8 × 1.06820 = US$ 29.8 million failing which GIC can be said to have incurred a loss of earnings compared to its average earnings. At the very least, GIC’s UBS holdings must go up to US$ 8 × 1.02920 = US$ 14.2 million to keep up with an annual inflation rate of 2.9% per year over 20 years [6].

[1]
• Snook’s article (wrong)
At the height of the financial crisis GIC invested CHF 14 billion (then US$10 billion) in UBS.

• Business Times, GIC prepared to stay with Citi, UBS, 30 Sept 2010
GIC’s investment of 11 billion Swiss francs in convertible notes issued by UBS

http://www.reuters.com/article/2010/03/05/ubs-gic-idUSSGE62400M20100305
The Government of Singapore Investment Corp [GIC.UL] had invested 11 billion Swiss francs

• Asia One News, GIC invests $14 billion in Swiss bank UBS, 11 Dec 2007
THE Government of Singapore Investment Corporation (GIC) has made its single largest investment ever – a massive 11 billion Swiss francs (S$14 billion) – to buy a major stake in a Swiss bank.

[2]
• Snook’s article (wrong)
The investment was in the form of Mandatory Convertible Preferred Stock with an interest coupon of 10% p.a.

• Asia One News, GIC invests $14 billion in Swiss bank UBS, 11 Dec 2007
GIC’s investment takes the form of subscribing to ‘convertible notes’ which pay an annual return of 9 per cent.

http://www.reuters.com/article/2010/03/05/ubs-gic-idUSSGE62400M20100305
GIC had earned about 2 billion francs from a 9 percent coupon over the last two years

[3] Asia One News, GIC invests $14 billion in Swiss bank UBS, 11 Dec 2007
An unnamed investor in the Middle East is also injecting an additional two billion Swiss francs into the bank, UBS said yesterday.

[4]
• The Straits Times, GIC’s buys are good if UBS, Citi can weather recession: Analysts, 17 Jan 2008
GIC’s investment in Citigroup comes just one month after its US$9.75 billion injection into Swiss icon UBS.

• GIC website
15 Jan 2008 – The Government of Singapore Investment Corporation (GIC) has agreed to participate in Citigroup’s private offering of convertible preferred securities through an investment of USD 6.88 billion.

• The Straits Times, GIC invests $14 billion in Swiss bank UBS, 11 Dec 2007
THE Government of Singapore Investment Corporation (GIC) has made its single largest investment ever – a massive 11 billion Swiss francs (S$14 billion) – to buy a major stake in a Swiss bank.

[5]
• Reuters, Singapore’s GIC will convert Citi notes to stock, 27 Feb 2009
http://uk.reuters.com/article/2009/02/27/gic-citi-idUKSGC00104020090227
In January last year GIC bought about $6.88 billion worth of perpetual, convertible notes in Citi that pay a 7 percent annual dividend.

• Reuters, GIC converts UBS notes, faces $5 bln paper loss, 4 Mar 2010
http://www.reuters.com/article/2010/03/05/ubs-gic-idUSSGE62400M20100305
The Government of Singapore Investment Corp [GIC.UL] had invested 11 billion Swiss francs ($10.22 billion) in mandatory convertible notes in UBS to support the Swiss bank during the financial crisis.

[6]
• Financial Times, GIC incurs SFr5.5bn paper loss on UBS, 4 Mar 2010
http://www.ft.com/intl/cms/s/0/ccac00d4-2781-11df-b0f1-00144feabdc0.html#axzz2TauxHzM9
GIC rarely comments on its investment activities, but Lee Kuan Yew, the former Singapore prime minister who chairs the fund, has said that it plans to hold the stock for “two or three decades”.

• GIC website
http://www.gic.com.sg/en/faqs/search/199-performance-returns#28
In its annual report for 2011/2012, GIC reported 5, 10 and 20-year annualised nominal returns in USD terms of 3.4%, 7.6% and 6.8% respectively. It also reported a 20-year real rate of return of 3.9%. The rolling 20-year real rate of return is the primary metric for the Government to evaluate GIC’s investment performance.

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