Another day, another scary UK bank story.
From The Times:
A clause inserted during the Abu Dhabi Royal Family’s investment in Barclays last October has made it practically impossible for the Government to take a meaningful stake in the bank, The Times has learnt. News of the clause is likely to reignite controversy over the way that Barclays raised the money — dubbed at the time by Vince Cable, Liberal Democrat Treasury spokesman, as “a scandal of mammoth proportions”. Barclays shares fell another 9 per cent yesterday, having collapsed by 35 per cent at one point, amid speculation that it is poised to raise more capital — either in the market or from the Government.
The Daily Telegraph also splashed with the tale:
The Government is in talks with Barclays after the bank admitted that raising extra capital could trigger a clause that would deliver control to its Middle East investors. Government insiders were last night reeling at the possibility that helping Barclays could see Britain’s fourth biggest lender automatically delivered to the Middle East as the result of a little known clause agreed in the bank’s October capital raising.
But is Barclays “practically unable” to issue fresh equity as the above reports suggest? And if it did would the UK’s third biggest bank really be handed on a silver platter to its friends in the Middle East?
Not necessarily.
The background here is that three months ago Sheikh Mansour Bin Zayed Al Nahyan, a member of the Abu Dhabi royal family, and two Qatari investment vehicles invested over £7bn in Barclays. In return, they received a mixture of reserve capital notes, warrants and mandatory convertible notes.
Now, the £3bn of warrants and £2.8bn of MCNs both contain anti-dilution clauses which adjust the conversion prices – 197.8p and 153p respectively – in the event of a rights issue or an adjustment to the nominal value of Barclays’ shares.
Here’s the little known clause relevant par from the placing prospectus.
The issue of new shares or certain other securities and rights of Barclays PLC, at any time commencing on the Issue Date and ending on the Optional Conversion Date or on the Mandatory Conversion Date, at a price (the Future Placing Price) lower than the then current Conversion Price will (subject to exceptions for Ordinary Shares issued pursuant to employee share schemes, under the Warrants or as a result of certain corporate events) result in a downward adjustment to the Conversion Price (subject to a minimum Conversion Price of the then par value per Ordinary share (currently 25 pence) so that it equals the Future Placing Price.
The Conversion Price will also be subject to adjustment if Barclays PLC distributes an extraordinary dividend or certain dilutive events occur, including, bonus issues, rights issues or an adjustment to the nominal value.
So, if Barclays were to raise capital prior to June 30 (the latest date for conversion of the MCNs), then the conversion price would be reset from 153.3p to the future issue price.
Similarly, there are provisions to adjust the issue price on the £3bn of warrants (currently 197.8p).
But importantly, there is no clause to prevent Barclays issuing new equity to HM Government, or other shareholders.
Now, Cazenove – admittedly one of Barclays’ brokers and therefore not completely independent – has crunched some number on the warrants and MCNs. Assuming Barclays was to issue £3bn of equity at 60p a share they find:
The fully diluted shareholding of Middle Eastern investors would increase from 32% to 41%.If HMG were to subscribe for the new equity then it would own 20% and other existing shareholders 39% (currently 68%).Therefore:
We disagree with the inferences of the press reports. In our view, HMG is not prevented from taking a stake in the company. Further, if Barclays were to raise new equity before 30th June 2009, and the Government subscribes for the capital, then it does not necessarily lead to Middle Eastern investors owning a majority stake in the company.
Of course, there are lots of ifs and buts in there – not least the assumed issue price – but it does show that Barclays would not necessarily end up under the control of its Middle Eastern investors.
That’s one less thing to worry about.
Related Link:
What’s rocking Barc – FT Alphaville