- by that we mean RBS, of course.
And like the American insurer, the Scottish bank is becoming a financial black hole, capable of sucking in billions and billions of taxpayers cash.
Thursday’s statement from the stricken bank reveals that the government will inject further £13bn into RBS through a purchase of B shares and stands ready to subscribe for a further £6bn. (The new equity is going in at 50p a share).
RBS will also issue another £6.5bn of B shares HM Treasury to pay for its participation in the Asset Protection Scheme (APS).
So that’s a total of £25.5bn, on top of the cash the government has already pumped into RBS.
And in return?
By participating in the Scheme RBS would be able to free up its lending capacity. Consequently, RBS would increase its lending to UK homeowners and businesses who meet RBS’ ordinary course credit and pricing criteria on RBS’ normal commercial terms by £25 billion over the next 12 months. Where there is demand, the increased lending will be split £9 billion to mortgage lending and the remaining £16 billion to business lending. A further £25 billion increase is targeted in 2010.
As for the APS, RBS is proposing to offload £300bn of assets. It will take a first loss of £19.5bn, thereafter losses will be spilt 90 per cent HM Treasury and 10 per cent RBS.
And there is some pretty smelly stuff going into the APS.
The assets would be drawn from RBS’ and certain of its affiliates’ portfolios of corporate and leveraged loans, commercial and residential property loans, structured credit assets and such other assets as the Treasury and RBS agree are to be included in the Scheme. It is also envisaged that the Scheme may include structured synthetic assets and counterparty risk exposures associated with certain derivatives transactions with monoline insurers and credit derivative product companies. RBS expects that the Scheme will protect: £225 billion of third party assets, £44 billion of undrawn commitments, and £33 billion in other counterparty risk exposures.
Subject to DD of course.
Implementation of the Scheme for RBS will be subject to further due diligence by the Treasury and its advisers, documentation and satisfaction of applicable conditions (including the application criteria and asset eligibility criteria of the Scheme) and conditions precedent to accession in the Scheme, including State aid, regulatory and shareholder approvals.
One other thing does stand out with regards to the APS – the fee. At 2.1% of insured assets this is well below expectations and presumably explains why shares in Barclays and Lloyds Banking Group have risen sharply. The £19.5bn first loss charge and 10% of all subsequent losses also looks very generous.
Related Links:
The worst company in the world – FT Alphaville
Statement on the Government’s Asset Protection Scheme – HM Treasury
Asset Protection Scheme and increased lending – HM Treasury