The $US7.5 billion bail out of Citigroup, America’s biggest bank by assets, by the Abu Dhabi Investment Authority is a fascinating deal. It’s been portrayed as something of a win-win: Abu Dhabi gets a good deal and Citigroup gets a much needed capital injection.

But the reality is more simple: the deal reveals that Citigroup is the first world major bank to be valued at junk bond status. It is paying Abu Dhabi an interest rate — 11 per cent — that only companies with doubtful futures would be charged.

That 11% rate is almost double the rate Citigroup has paid investors in recent bond issues. The troubled Countrywide Financial Corp, America’s biggest mortgage issuer in 2006, agreed to a rate of 7.25% when Bank of America injected $US2 billion two months ago.

The bank’s shareholders are being diluted, the buyer is getting a bargain and the board and management who are responsible for the bank’s parlous state, get away scot free and are made to look clever.

But there is nothing clever about this deal. Citigroup was desperate for a big capital injection. The 11% it is paying the Abu Dhabi group is going to preserve a dividend that, based on the current low share price of just over $US30, carries a yield of 7.1%.

That high yield, especially for a bank, represents the high level of risk the market is pricing into the share price by depressing it. So to protect such a high risk, high dividend yield, the bank has agreed to pay a high risk interest rate: desperate times call for desperate measures.

The deal was done to preserve Citigroup’s 54 US cent-a-share quarterly dividend, which will cost the bank about $US2.7 billion a quarter (based on 4.98 billion shares on issue), meaning the Abu Dhabi money is enough meet almost nine months of dividends.

No matter how the bank spins it, it was a bail out and Abu Dhabi has jumped at the opportunity to buy into a faded blue chip very cheaply.

Abu Dhabi has bought the right to convert its securities into a stake of up 4.9% of the bank, depending on the eventual conversion price. The securities will convert into Citigroup shares at prices ranging from $US31.83 to $US37.24 between March 2010 and September 2011.

That would rank the state owned fund as Citigroup’s largest shareholder ahead of Los Angeles-based Capital Group Cos. and Saudi billionaire Prince Alwaleed bin Talal. He bought a 4.5% stake back in 1991, the last time Citi needed bailing out. Prince Alwaleed, a nephew of Saudi King Abdullah, invested $US590 million at a time when the bank needed cash because of loan losses in Latin America and a collapse in US property prices. Alwaleed’s stake is now worth about $US6 billion.

The deal will mean more than 9.4% of Citi will be owned in the Gulf, which is a significant stake, given the importance of the region to US energy needs and its geopolitical objectives.