A CHASTENED Sir Fred Goodwin will today face anxious shareholders to defend his dramatic move to refinance under-pressure RBS by proposing Europe's largest rights issue.
The chief executive of Britain's second-largest bank could face opposition to the unprecedented £12 billion cash injection from holders of smaller tranches of shares at the company's AGM in Edinburgh today.
But last night it appeared that the anno
uncement of the rights issue, an admission of further sub-prime related write-downs, and a move to sell its insurance arm had bought Goodwin some time with the major institutional investors.
The cornerstone of yesterday's move involved RBS declaring it would issue 11 new shares for every 18 existing shares at a price of 200p per share, a discount of more than 40 per cent on yesterday's closing share price.
On top of that, RBS admitted to another £5.9bn of investment write-downs linked to the credit crunch – one third of which was attributable to the recently acquired Dutch bank, ABN Amro.
The group also said it was open to offers for its insurance arm, which includes Direct Line and Churchill Insurance and could raise as much as £5bn.
Taken together, the initiative is aimed at raising the amount of shareholder cash, or capital, held on its balance sheet as a share of the assets it holds known as the "tier 1 capital ratio".
These moves should allow it to keep a tier 1 capital ratio in excess of 6 per cent. RBS had a ratio of 4.5 per cent at the end of 2007, one of the lowest in Europe, and was expected to fall to just 4 per cent this year because of the integration of ABN Amro's wholesale business.
However, the move dealt shareholders – who have seen the value of stocks in the bank plunge over the year – a further blow. RBS said it will pay this year's interim dividend in shares, but planned a cash payout for the 2008 final divi.
A reflection of the pressure which Goodwin has been under came yesterday when he refused to say that he would still be in his job in a year's time.
The chief executive, who also ducked questions over whether he had offered his resignation, told a press conference in London: "Given our success in foreseeing markets, it would be bold to foresee anything else into the future."
Today's AGM could see small shareholders asking awkward questions of the strategy being pursued by Goodwin and his chairman, Sir Tom McKillop.
However, a bigger test will come for the duo when they seek to sell the rights issue to the large institutions.
One well-placed City insider said: "The moment of truth is not really at the AGM, which is a necessary piece of theatre the management has to endure, even though it may be unpleasant.
"The real moment of truth is the first time the chief executive has to meet shareholders cap in hand to ask them to support the rights issue."
McKillop yesterday leapt to the defence of Goodwin, saying that both executive and non-executive directors took responsibility for the U-turn by the bank which had previously said there would be no need for a rights issue.
The chairman announced that the company would be looking for three new non-executive directors, a key demand of their critics in the investment houses.
One will be from a UK banking background, one from the USA and one from Asia, Sir Tom said.
RBS shares were down 3.9 per cent to 358p.
A bowl of credit crunch but no new kitchen for Lady McK THE story so far: Back on 8 November, in a fit of euphoric bravura, RBS chairman Sir Tom McKillop bought 118,000 shares in RBS at 419.5p, at a total cost of £495,010, in the hope that the credit crisis was over.
Sadly, as we have tracked on these pages, the McKillop Share Index has since plunged in value. At yesterday's midday price of 360.25p his investment was down £69,915 (14 per cent). However, a dividend worth £27,140 is payable on 6 June. But now comes news of a massive 11 for 18 rights issue, which will cost him £144,222.
The McKillop household last night:
McK: Hello, dear, I'm home. Bad news, I'm afraid.
Lady McK: What's that, dear?
McK: That new kitchen I promised with the RBS divi? It'll have to go back.
Lady McK: It's not even in!
McK: And the kitchen sink we've already got, that'll have to go back, too.
Lady McK: How will we cope?
McK: I need to find £144,000 so the divi cheque's well gone. We'll just have to economise.
McK weans: Oh, no! Not Scotmid sausages!
LMcK: And who's to blame for this?
McK: Sir Fred says...
LMcK: Sir Fred? You can tell Sir Fred *!*&$** ! from me!
McK: The holidays are off, too.
LMcK: What? The villa in the Côte d'Azur?
McK: It's a day trip to Dobbies.
McK weans: Oh, no, not Dobbies!
LMcK: RBS! I'm switching to the Co-op.
McK: Don't worry, dear. It'll pick up soon, once the credit crunch is over.
LMcK: I'll give you credit crunch!
McK weans, waving empty bowls: Oh, no, not credit crunch!
(to be continued...)
HBOS and Barclays next in line?BARCLAYS and Edinburgh-based HBOS were yesterday seen as likely to follow Royal Bank of Scotland by appealing to shareholders for funding.
Experts said that RBS's £12 billion move could open the floodgates for rights issues as banks seek to boost their balance sheets after suffering hefty credit-crunch losses.
On Monday, Bank of England Governor Mervyn King signalled there would be more rights issues to come, saying he was "pleased that banks have recognised the need to raise capital".
Analysts at JP Morgan estimated that four of the UK's biggest banks were facing a combined £37bn shortfall in capital funding, with Barclays and HBOS most in need of a capital injection.
JP Morgan said in a note that HBOS had an £11bn capital hole, with Barclays short by £8bn, adding that "lack of capital in the UK banks is a systemic issue, not an RBS-specific one".
Barclays yesterday said there was "no change to our policy in respect of capital", as its shares shed 3.7 per cent on the London market.
Shares in HBOS, also down 3.7 per cent yesterday, were badly hit last month after speculation the bank was poised to launch a rights issue – rumours that were strongly denied by HBOS and were reported to the Financial Service Authority amid allegations of market abuse.
WHAT DOES IT MEAN FOR INVESTORS?THERE are around 200,000 RBS shareholders, of which 93 per cent are major investors such as pension funds and investment firms.
The other 7 per cent is made up of private individuals. At the end of last year, 56 per cent of shareholders were UK-based, with 27 per cent in the US and 14 per cent in Europe.
How the rights issue works:
• A circular announcing the scheme will be sent to shareholders before the end of this month. In early May, they will also receive a prospectus with more details.
• Shareholders will then be sent an allotment letter, telling them how many shares they have got and how many they are entitled to apply for.
• They will be given a deadline to make a decision, probably around a month.
• RBS is issuing 11 new shares for every 18 existing shares at a price of 200p per share. For a shareholder with 1,800 shares, they would be offered an extra 1,100 at a cost of £2,200.
• RBS shareholders can take up their rights and leave their stake undiluted. They can sell the rights for an agreed sum but see their holding diluted.
They can let the rights lapse when they will be sold at the prevailing market price, again a dilution of the shareholding.
Or they can sell enough of the rights to take up the balance, known as "tail swallowing".
• Any shares not bought will be taken up by the scheme's underwriters, investment banks Goldman Sachs, Merrill Lynch and UBS.
• The bank will seek approval for the capital-raising scheme at an extraordinary general meeting in mid-May.
• If the move is approved, trading in the rights will start shortly after. Trading in the new paid-up shares will start sometime in June, with RBS's share price set to fall in line with the dilution of its share capital. Based on a current price of 370p, the post-rights issue price would be around 305.5p, analysts said.
The full article contains 1469 words and appears in The Scotsman newspaper.
