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Numbers flying around the London market on Friday morning suggested that a forthcoming rights issue from Royal Bank of Scotland could be a whopper - notwithstanding the conflicting reports.
Remember getting het up about BT rescue rights issue in 2001? Small beans at £5.9bn.

The first set of mooted figures had RBS looking at a 2 for 5 rights at 365p, which would put its emergency cash call at a vast £14.6bn. The rumours got revised down later in the morning, as RBS stock, which had started the day strongly, fell more than 2 per cent to about 360p. A 2 for 5 rights at 265p to 285p would still amount somewhere north of £10bn.

Still vast enough to come in as the largest rights issue on record.

RBS magnanimously recommended a raised final dividend of 23.1p a share back in February. Pali’s Bruce Packard points out that the shareholders, who are being offered gifts with one Scottish hand and potentially slapped in the face with the other, will have to vote on that payout at the AGM next Wednesday. But the shares are already trading ex-div, so the payment’s in the price. Some might think the bank should keep hold of the £2bn-odd that the dividend would cost, but the institutions, with one eye on the prospect of cheap stock, are unlikely to vote a payout down.

There’s likely to be a regulatory or political stick at work here, possibly with the carrot of increased assistance forthcoming from the Bank of England.

With a core equity tier 1 ratio of about 4 per cent, RBS is the most thinly capitalised bank in the UK and Europe. Numbers published by Collins Stewart suggest that raising that ratio to the level of Barclays or Hbos, the next lowest at 5.4 per cent and 5.7 per cent, would require about £7bn in capital.

But there’s also the prospect of further writedowns on its £3.8bn ABS CDO exposure or on those leveraged loans that proved so remarkably resilient in the February numbers. The bank has potential for further disposals, such as its stake in Bank of China though that would represent an(other) embarrassing climb-down. The planned sale of Angel Trains, meanwhile, has gone rather quiet.

In short, the outsize figures look feasible. After all, the trick with emergency cash calls is to make them sufficiently large to eliminate any doubt that you’re going to have to return for a second bite. Morgan Stanley’s research on the return of rights issues found that companies which raised a large amount relative to their market cap did better following a fund raising than those asking for less.

There’s clear water between RBS and next most capitally-challenged of the UK’s banks, Barclays. Hbos continues to attract attention thanks to its spot as the UK’s largest mortgage lender and the potential for its ratios to fall, under Basle II, along with house prices. With rights issues firmly back on the UK banking agenda, their share prices outpaced RBS’s falls on Friday.

Update - Peter Thal Larsen discusses the RBS story on FT.com video.

Related links
Sir Fred Goodwin, 2001-2008 - Alphaville
RBS prepares massive rights issue - FT.com
Adding up is hard to do at RBS - Alphaville, February