Abu Dhabi is assessing its $7.5 billion investment in Citigroup as the bank's problems deepen and consequences of a possible nationalization become clearer, according to sources close to the Abu Dhabi Investment Authority (ADIA).

ADIA invested $7.5 billon last year in Citi through convertible bonds that pay 11 percent in interest, but it must start converting the bonds into 235.6 million shares in Citigroup from March next year.

Nothing has changed from ADIA's perspective at this point. ADIA's convertible bonds are due for conversion in a phased manner between March 2010 and September 2011, and that stands, an Abu Dhabi government official told Reuters.

But it is carefully assessing its options due to the latest events -- although no decision is taken yet, he said, declining to be named.

A spokesman for ADIA, thought to be the world's largest sovereign fund, declined to comment.

Abu Dhabi is the wealthiest of seven emirates within the United Arab Emirates, the world's fifth-largest petroleum exporter.

ADIA's returns as a bondholder have been unaffected by continuing troubles at Citigroup, but the dramatic fall in Citi's share price has eroded the conversion value of the mandatory convertible bonds.

In the original deal with ADIA, the Citi securities must be converted into common stock at a price between $31.83 and $37.24 a share between March 2010 and September 2011. Citi last traded at $1.50 a share.

Options for the investment include holding them through to the conversion, which may allow enough time for the share price to recover, or converting them early, in a move that may head off the possibility of the U.S. government nationalizing it.

We know ADIA is following the recent developments closely, but as a bondholder, ADIA's investments are secure because the U.S. government has left bond holders untouched, unlike other investors such as preferred shareholders, a senior Abu Dhabi-based banker close to ADIA said.

However, it is early days, and we need to wait and see what ramifications the latest events would have and whether there would be pressure on investors in bonds to convert (early), he said.

Citi, he said, has been urging preferred shareholders and convertible bond holders to convert to common stock to help avoid nationalization by the U.S. government.

FORCED CONVERSION?

On Friday, the U.S. government announced it would convert up to $25 billion of its $45 billion worth of preferred stock into common equity at $3.25 per share.

Other preferred shareholders, including the Government of Singapore Investment Corporation and Saudi Arabia's Prince Alwaleed, will convert up to $27.5 billion of their holdings at the same price.

Compared to Alwaleed or Singapore, ADIA has no aspirations in any controlling stake or a board seat and is just happy to ride along as an investor with regular returns. At least for the moment, ADIA's investment is safe, an Abu Dhabi-based financial analyst said.

ADIA is a long-haul investor and is in a different boat compared to other investors in Citi, he said, declining to be named due to company policy.

Gulf sovereign funds have been badly burned buying into troubled U.S. banks, with the Kuwait Investment Authority investing last year in U.S. banks Citigroup and Merrill Lynch before both stocks dived and the latter was sold for a fraction of its earlier price to Bank of America.

Major sovereign wealth funds are now holding off big investments abroad, with some focusing on investing at home to stimulate economies in the wake of the global crisis, a recent survey showed.

(Reporting by Stanley Carvalho; Editing by Thomas Atkins/Will Waterman)

United arab emirates Citigroup Investment