Citigroup is to pay $825 million a year in interest to the Abu Dhabi Investment Authority in order to secure a $7.5 billion capital injection, in what analysts said was an indication that the bank's capital base is inadequate.

The Abu Dhabi Investment Authority is to spend $7.5 billion buying Citigroup bonds that will convert to shares, bringing much-needed capital to the troubled bank which announced thousands of job cuts last night.

The investment will give Citigroup a capital boost as it grapples with the credit crunch and continues its search for a new chief executive. But the cost of the finance surprised some analysts, who said it suggested Citigroup's capital position was worse than previously thought.

Citigroup will pay the Abu Dhabi Investment Authority 11 per cent annually, until the bonds convert to shares that will give the sovereign wealth fund a 4.9 per cent stake, making it Citigroup's biggest shareholder.

Meredith Whitney, the CIBC World Markets analyst who sparked a sell-off last month when she wrote in a note that Citigroup needed to raise $30 billion capital, said the deal was similar to the one it closed in the early 1990s, when the bank was in dire straits. She said it still had work to do in shoring up its capital base and that the company will still have to sell assets and cut its dividend.

Simon Denham, managing director of Capital Spreads, said there was a danger the Abud Dhabi Investment Authority was "catching a falling knife". He added: "The cost to Citigroup for the cash injection seems to be quite extreme. Selling securities that possibly pay a yield of some 11 per cent compares to US Government two year yields of sub 3 per cent an 8 per cent, plus premium. The company has obviously run into rather a bigger capital adequacy problem than was first thought."

Mr Denham said the capital boost should set Citigroup back on track, but some analysts disagreed.

Citigroup said the payment rate reflected "market terms based on the conversion premium as well as Citi's current dividend yield."

But Citigroup shares rose on futures markets as some analysts said that the purchase would be interpreted as a bet that the recent rout on financial stocks is petering out.

Bo Brownstein, Cambiar Investors analyst, told Reuters: “Citi is big, it’s widely followed, and when people see confidence in it, it should mean something.”

Sir Win Bischoff, the European head of Citigroup, said in a statement: “This investment, from one of the world’s leading and most sophisticated equity investors, provides further capital to allow Citi to pursue attractive opportunities to grow its business.”

The Abu Dhabi Investment Authority is buying mandatory convertible securities that can be converted into Citigroup stock in 2010 and 2011 at prices ranging from $31.83 to $37.24 per share. Citigroup shares closed at $30.70 last night.

The investment by the sovereign fund of Abu Dhabi emirate, comes amid a spate of activity among Middle Eastern funds. Dubai International Capital, the fund owned by Dubai ruler Sheikh Mohammed Bin Rashid al-Maktoum, bought a "significant" stake in Sony yesterday.

The capital injection came as Citigroup, still seeking a replacement for its deposed chief executive Chuck Prince after announcing $11 billion sub-prime writedowns, admitted it was cutting more jobs.

CNBC reported the total could be 45,000 jobs, in addition to the 17,000 redundancies announced in April.

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