John Varley and Bob Diamond understand markets. Of that we can be sure.
We should assume then that the Barclays duo know what their share price is saying: there is a growing risk of management implosion here, a collapse of the bank’s funding plans and a shameful visit to No. 11 Downing Street.
The stock dipped as low at 156p on Thursday – within 3p of the strike price of the Mandatory Convertible Notes that Barclays is using to raise a good deal of the £7.3bn it needs to mend it balance sheet.
Sandy Chen at Panmure summed up the mood, declaring himself a “firm seller,” with a 130p price target:
There is a lot of recent news for UK banks’ shares to price in, including (1) the revised strategy for the US TARP, which we expect will lead to further write-downs in the RMBS, ABS etc that the US Treasury will no longer be buying, (2) the BOE’s confirmation yesterday that the UK is already in a recession that will last well into 2009, (3) Moody’s raising its expectations (again) that corporate default rates will rise, i.e. higher corporate defaults and even further pressures on CDSs and synthetic CDOs, and (4) today’s announcement on PPI (payment protection insurance) by the UK Competition Commission, proposing a ban on sales of single-premium PPI and delinking the sale of PPI from the sale of the underlying consumer loan, which will eat into UK banks’ fee income.
All the above news can be read into all of the UK banks, but we see BARC as particularly exposed given the potential shareholder revolt at the 24 November EGM to approve its £7bn capital raising. The press has reported that some key shareholders are planning to vote against the capital raising, even if the potential terms from a UK government bailout may be more expensive than the already-expensive terms.
We had cut our mid-2009 share price target from 160p to 130p following BARC’s IMS a few weeks ago; with the additional risk that shareholders may vote down the proposed capital raising we remain firm Sellers.
But even if November 24 turns out to be a non-event, there may be a bitter aftertaste.
Intentionally or otherwise, the structure of Barclays’ capital raising meant the bank did not have to publish an extensive prospectus, helping to keep prying eyes away from its sensitive balance sheet.
Mandatory convertibles – quasi-debt that will turn into pure equity next June – looked to be a cunning ruse. But if the market price ends up sitting below the conversion price (153p), possibly for months on end, investors’ patience will be sorely tested.
Call it bank blight.