Barclays Plc, Britain's second-biggest bank, will raise £7.3 billion ($11.8 billion) from a group that includes investors in Abu Dhabi and Qatar as credit-market writedowns deplete capital.
Chief Executive Officer John Varley tapped sovereign wealth funds in the Mideast to avoid a UK government bailout plan that calls for overhauling management boards, capping executive salaries and banning dividend payouts. Barclays fell as much as 11 per cent in London trading on Friday.
Barclays will sell £5.8 billion of convertible notes and preferred shares that pay as much as 14 per cent annual interest through 2019 to the Mideast investors, the London-based company said today in a statement. The bank also plans to sell as much as £1.5 billion of securities to new and existing shareholders in an offering that closes on Friday.
“The good news is they have managed to raise the money and have avoided going cap in hand to the government or pursuing a heavily discounted rights issue,” said Alan Beaney, head of investments at Principal Investment Management in Leeds, England who manages $2 billion including Barclays' shares. “On the other hand, instead of being diluted by the UK government, shareholders are being diluted by sovereign wealth funds.”
Barclays, down 10 per cent at 184 pence as of 10:30 am, has lost 62 per cent of market value this year. Only HBOS Plc and Royal Bank of Scotland Group Plc have fallen more among the UK's biggest banks, and both companies have ousted their CEOs after being forced to participate in the government-assisted programme.
‘Self Determination’: “It is important to ensure self determination and our destiny,” said Barclays Chairman Marcus Agius told analysts on a conference call on Friday “We are satisfied we will,” he said.
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Barclay has until the end of the year to meet new capital requirements set this month by the UK to prevent credit writedowns, a loss of confidence and a recession from destroying the country's banks. Barclays said it expects the share sales to lift its Tier 1 capital ratio to more than 11 per cent from 7.9 per cent as of June 30.
Barclays took £1.2 billion of new credit markdowns, adding to £2.8 billion in the first half, it said on Friday.
Bad loans are rising at a faster pace than in the first half, and capital market volumes in October were lower than September, the company said.
‘Slightly Ahead’: Still, Barclays pretax profit for the nine months ended September 30 was “slightly ahead” of 2007, it said in a separate statement today. Costs rose in line with revenue, and profit in its global retail and commercial banking unit was ahead of 2007.
Barclays, which bought Lehman's North American unit for $1.75 billion after the New York-based securities firm filed for bankruptcy on September 15, said the deal is helping profit. The business “is better than our expectations,” said Rich Ricci, chief operating officer of Barclays Capital, who is running the unit until its is integrated.
Barclays latest fund raising gives two investors in Qatar almost 16 per cent of Barclays. The government of Abu Dhabi gets more than 16 per cent of the stock.
Barclays will sell as much as £4.3 billion of convertible stock paying an interest rate of 9.75 per cent until June 30 next year, when the securities will convert to common stock. Qatar Holding, Challenger Universal Limited, an investment vehicle set up by the Qatar Government, and Sheikh Mansour Bin Zayed Al Nahyan, a member of the Royal Family of Abu Dhabi, will invest a total of £2.8 billion in the convertible stock, enabling them to buy new Barclays shares at 153.276 pence apiece.
Second Time: Barclays is turning to Mideast investors for the second time this year. It raised £4.5 billion in July with support from sovereign wealth funds after most existing shareholders shunned a share sale. The Qatar Investment Authority became the biggest investor in Barclays with a 6.2 per cent stake in July, and Challenger bought a 1.86 per cent stake in July.
Institutional investors outside the West Asia also can participate in Barclays's fund raising. The bank is offering as much as £1.5 billion of remaining convertible stock on terms similar terms to those offered to sovereign wealth funds in a deal that closes at 5 pm on Friday, Barclays said.
Barclays will pay a higher interest rate when it sells £3 billion of preferred stock. The securities will pay 14 per cent annual interest through 2019, and jump to 13.4 per cent over the 3-month London interbank offered rate, or Libor, after 2019. The securities come with warrants that allow the investors to get stock for 197.775 pence apiece, less than yesterday's 205.25 pence closing price. The investors are also being paid a fee of 2 per cent, or £60 million , for their commitment to buy the securities.
‘Not Cheap’: “It's not cheap to do these things at the moment,” said Colin Morton, who helps oversee $3 billion, including Barclays stock, at Rensburg Fund Management in Leeds, England. “They're having to pay quite a big coupon until it redeems. But that's become par for the course.”
Selling the securities will mean a “material” dilution to Barclays's earnings and book value, said Alex Potter, a London- based analyst at Collins Stewart Plc, who has a sell rating on the stock. His initial estimate is that tangible book value will decline to 210 pence a share assuming the Qataris exercise their warrants.
“Government intervention is being avoided, albeit at a very high cost, in our view, with an eye on resuming dividend flow more quickly than the peer group.” Potter said.
Banks worldwide have raised $692 billion in capital since the global credit crisis began 13 months ago, sending stock markets plunging. The contraction in credit markets led to the failure of New York-based Lehman Brothers and Washington Mutual Inc.
Edinburgh-based RBS plans to raise £20 billion in a share sale underwritten by the UK. The deal will give the government as much as 60 per cent ownership unless investors buy shares, restrict management pay and dividend payouts, and led to the ouster of CEO Fred Goodwin.
Lloyds TSB Group Plc, which agreed to buy UK mortgage lender HBOS Plc in a government backed deal, together may raise as much as £17 billion from the government.