It seems too easy. Lose billions on the value of corroded assets, but instead of suffering the anguish, you issue rights. That is the tract that one of Britain’s largest banks has taken. In an Enron-esque type of rights issue, Barclays seems to believe it can have its cake and eat it too:
The intention is to ensure that the value of shares owned by existing investors in Barclays is not diluted. It is likely they will be offered the chance to buy the same percentage of shares in the placing, but it will be underwritten by the sovereign funds.
The method used to achieve this will be a pre-emptive offer to sovereign wealth funds at a premium:
In this scenario, the bank would line up buyers to take the shares at an agreed price before then offering the new shares to all its existing shareholders to have first right of refusal.
“Under the pre-emptive structure, we believe the placement would initially be made with, say, a number of Sovereign Wealth funds, following which existing shareholders would be able to claw back stock on equal terms,” said Keefe, Bruyette & Woods in a note.
Analysts believe the new shares would not be offered at a discount to the existing share price to avoid diluting the value of its shares, a tactic that may be unattractive to some shareholders but it will still have the advantage of being underwritten by big financial institutions.
“This is clearly less dilutionary than a rights issue and also solves the capital shortfall perception and gives the company greater room to absorb further write-downs,” said Collins Stewart analyst Alex Potter.
Barclays reported writedowns of £2.6 billion - $5.1 billion - through the first quarter of this year related to the subprime lending crisis in the United States.
Its credit writedowns have been less than those at peers including Royal Bank of Scotland Group, which raised £12.3 billion - $23.4 billion - in Europe’s biggest rights issue, and HBOS, which is seeking 4 billion pounds (US$ in a rights offering.
Well that’s all there is to it. If you can’t cover your losses due to write-downs on credit-crumpled investments, then have your cake and eat it too. But eat it slowly and make it last just in case. The credit crisis is just beginning, and all the banks are lining up cap in hand to sovereign wealth funds worldwide. That spells competition and the common sense that selling out to wealth is not profits made and sooner or later even the funds will grow impatient. Oops sooner it seems.
Barclays plans to issue billions of pounds worth of equity to new and existing shareholders to strengthen its frayed balance sheet. Market commentators had expected that China Development Bank (CDB) would take up the offer to avoid having its holding diluted.
But political and financial concerns make CDB reluctant to invest more money in Barclays than the 2.2 billion euros it paid for its initial stake last July, the sources said. They added that the Chinese bank had not yet made a final decision.
“The losses on that so far, the scandal surrounding the bank’s (CDB’s) vice president and the bank’s ongoing structural reform make it very unlikely that CDB will make any immediate major purchase,” an official in the banking sector told Reuters.
CDB has seen the value of its investment in Barclays, made just before the credit crisis rocked financial markets, fall by more than 50 percent over the past 10 months.
“CDB is now very cautious about risks in overseas investments,” said a separate banking source close to the Chinese bank. “Even though the price is much lower than last year, who knows whether it might not dip further?”
Who but the banks can blame them?
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