Barclays' capital gamble
Poor timing makes Barclays' £4 billion capital raising a very risky affair.
breakingviews.com
Barclays may be about to do a good deal at a terrible time. The UK bank sat tight while rivals HBOS and Royal Bank of Scotland dragged themselves through arduous rights issues. Now Barclays is talking to funds, understood to include the China Development Bank and Temasek of Singapore, about selling £4 billion of new shares, adding about 20 per cent to its market capitalisation.
If a deal of this sort is handled carefully, existing shareholders need not feel hard done by. They would have to be offered participation at the issue price in order to abide by UK guidelines, which say companies should turn to current shareholders first if they want to issue more than 5 per cent of their shares. Also, any extra incentives doled out to the new investors, such as underwriting fees, would have to be spelled out clearly.
If those conditions are met, a direct placement could be a good way to proceed. It would eliminate the risk of a stock overhang that comes with a rights issue, since CDB or Temasek would presumably want to keep any shares that existing shareholders don't want. In a normal rights issue, bank underwriters usually dump the rump, pushing down the share price. A placement would be quick too, requiring only two or three weeks to convene an EGM. And there would be none of the tradeable rights that have made it easy for short-sellers to push down other banks' share prices.
Still, there is a question of timing. Barclays will claim the capital raising isn't an emergency. That isn't persuasive. While £4 billion of equity would leave the bank's equity tier one ratio, an important measure of capital strength, at around 6 per cent compared to its 5.25 per cent target, it's hard to explain why issuing equity is an attractive proposition when the share price has fallen by almost 40 per cent in 2008 alone.
If Barclays had moved quickly to raise money before its peers, it would have been doing so from a much stronger position. The day before RBS announced its rights issue in April, Barclays shares were trading at 478p. At that price, it could have raised the same £4 billion – but spared shareholders a potential 5 per cent of dilution, as well as weeks of uncertainty.
For further commentary visit www.breakingviews.com
Barclays may be about to do a good deal at a terrible time. The UK bank sat tight while rivals HBOS and Royal Bank of Scotland dragged themselves through arduous rights issues. Now Barclays is talking to funds, understood to include the China Development Bank and Temasek of Singapore, about selling £4 billion of new shares, adding about 20 per cent to its market capitalisation.
If a deal of this sort is handled carefully, existing shareholders need not feel hard done by. They would have to be offered participation at the issue price in order to abide by UK guidelines, which say companies should turn to current shareholders first if they want to issue more than 5 per cent of their shares. Also, any extra incentives doled out to the new investors, such as underwriting fees, would have to be spelled out clearly.
If those conditions are met, a direct placement could be a good way to proceed. It would eliminate the risk of a stock overhang that comes with a rights issue, since CDB or Temasek would presumably want to keep any shares that existing shareholders don't want. In a normal rights issue, bank underwriters usually dump the rump, pushing down the share price. A placement would be quick too, requiring only two or three weeks to convene an EGM. And there would be none of the tradeable rights that have made it easy for short-sellers to push down other banks' share prices.
Still, there is a question of timing. Barclays will claim the capital raising isn't an emergency. That isn't persuasive. While £4 billion of equity would leave the bank's equity tier one ratio, an important measure of capital strength, at around 6 per cent compared to its 5.25 per cent target, it's hard to explain why issuing equity is an attractive proposition when the share price has fallen by almost 40 per cent in 2008 alone.
If Barclays had moved quickly to raise money before its peers, it would have been doing so from a much stronger position. The day before RBS announced its rights issue in April, Barclays shares were trading at 478p. At that price, it could have raised the same £4 billion – but spared shareholders a potential 5 per cent of dilution, as well as weeks of uncertainty.
For further commentary visit www.breakingviews.com
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