barclays-shareholders-take-the-bait

Barclays shareholders take the bait

Barclays shareholders lap up $754 million worth of reserve capital instruments, but the outcome of a forthcoming vote on the investment by Abu Dhabi- and Qatar-based investors is still unclear.
Barclays announced yesterday that shareholders had subscribed to the entire ú500 million ($754 million) worth of reserve capital instruments offered to them, just one day after BarclaysÆ board said it will forego bonuses for 2008 and that all directors will offer themselves for re-election.

In an attempt to appease shareholders, the UK bank on Monday announced a change in its capital-raising plan whereby Qatar Holding and His Highness Sheikh Mansour Bin Zayed Al Nahyan would jointly offer ú500 million of reserve capital instruments (RCIs) that would then be offered to BarclaysÆ institutional investors.

Barclays yesterday confirmed that the amount had been placed in full with the bankÆs institutional shareholders, but London-based Barclays spokesman Alistair Smith said no further information could be disclosed about which Barclays shareholders had bought the RCIs. Barclays Capital was sole adviser to the placement.

The background to the current placement lies in BarclaysÆ announcement on October 31 that it would raise ú7.05 billion ($10.6 billion) of capital from Middle Eastern sovereign wealth funds (SWFs) and others. The funding was split into ú4.05 billion of mandatorily convertible notes (MCNs) and ú3 billion of RCIs with warrants.

Barclays issued the bulk of the MCNs, which carry an annual coupon of 9.75% and are convertible into ordinary shares at a price of ú1.53 per share on June 30, 2009 at the latest, to Qatari investors (ú800 million) and HH Sheikh Mansour Bin Zayed Al Nahyan (ú2 billion). A further issue of ú1.5 billion worth of MCNs was offered to institutional investors on October 31, of which ú1.25 billion was subscribed. Barclays Capital, Credit Suisse and J.P. Morgan Cazenove were joint bookrunners for the placement of MCNs to institutional shareholders.

The conversion price on the MCNs represents a 22.5% discount to the average Barclays closing price on October 29 and 30. The Barclays board has told shareholders that it was the advice of its financial advisers that a placement of an amount of ú4.3 billion of MCNs with existing shareholders would have only been possible at a higher discount than the 22.5% discount at which the SWFs bought the ú2.8 billion of MCNs. And this could be true given that existing investors did not have appetite for even the entire ú1.5 billion of MCNs offered to them. But it is also worth noting that for the SWFs the MCNs were sweetened by being packaged alongwith RCIs.

The RCIs carry an annual coupon of 14% until June 2019 and are redeemable at the option of Barclays thereafter. The warrants, which represent 18.1% of BarclaysÆ existing capital, are exerciseable within five years from the date of issue and entitle the SWFs to 1.5 billion Barclays shares at a strike price of ú1.98 per share.

Barclays is paying fees and commissions on the ú7.05 million capital-raising of ú300 million, or around 4.2%.

BarclaysÆ management received a storm of criticism in the media for raising such expensive capital and faced allegations that it had chosen to forego cheaper UK government funding simply so that it could continue to pay bonuses to its key managers. Barclays' decision to offer its existing institutional shareholders the ú500 million of RCIs this week, representing 17% of the entire issue, was a gesture to mollify existing shareholders by offering them a chance to buy the same instrument.

But the instrument Barclays offered to shareholders is not as attractive as what was earlier sold to the Middle Eastern SWFs, which have relinquished part of the RCIs but retain the warrants and will continue to receive the entire ú60 million commission payable on the RCI deal.

In another sop to shareholders, Barclays also said on Monday that its executive directors will not be paid a bonus for 2008. This followed similar announcements from Goldman Sachs and UBS. The board also took full responsibility for the capital-raising proposal and the entire board will stand for re-election in April next year.

Barclays is trying to convince shareholders to vote in favour of the capital raising at an extraordinary general meeting scheduled for November 24. But the bank has created deep-rooted discontent among its shareholders with the parameters of the proposed deal.

Shareholder voting adviser PIRC has recommended clients vote against the capital-raising, saying it ôdoes not believe that the deal represents an improvement over the option of raising capital from the [UK] Treasury and does not share the companyÆs concerns about state interference in the bankÆs operations if this option had been takenö.

PIRC has also noted that some critics of the capital-raising believe Barclays is seeking independence so that the UK government does not influence its salary policies. PIRC has commented that it has "been a long-standing critic of remuneration practices at Barclays particularly for the head of Barclays Capital, Bob Diamond" and has highlighted the ú32 million Diamond earned in 2007.

On November 18 the Association of British Insurers, an industry association with 400 members from the UK insurance industry, placed a ôred topö on the forthcoming capital-raising vote.

The insurance association acknowledged the changes Barclays made to its October 31 proposal, but Peter Montagnon, the associationÆs director of investment affairs, said in a written statement released on Tuesday: ôThese changes cannot offset the concern of shareholders at the serious breach of the pre-emption principle, especially on an issue with a large discount. Other concerns include the preferential terms available to some investors, and the overall cost of the issue to existing shareholders.ö

The insurance association does not give advice to shareholders on which way they should vote but the ôred top flags issues of grave concernö.

PIRC and the insurance association raise valid points but it is also true that conditions in financial markets have been deteriorating quickly since Lehman went bankrupt in mid-September and have grown even more difficult since Barclays negotiated its capital-raising in October. The balance of power clearly now lies with investors, who are well aware that capital is fast becoming a scarce commodity.

As an investor class, SWFs are already highly exposed to the banking sector through the investments they have been making to bail out firms since the last quarter of 2007. The early investments are all out of the money and are unlikely to recover for the foreseeable future. Appetite for more bank paper is limited and SWFs are now willing to make further investments only on very attractive terms with as much downside protection as they can negotiate. In other words, BarclaysÆ management may have done the best it could under the circumstances.

But BarclaysÆ incensed shareholders see no mitigating factors for the UK bank to offer the Qatar and Abu Dhabi investors such high coupons, long-dated tenors and potentially up to 33% equity ownership of the company and have been dumping the bank's shares. The share price dropped 5% to a close of ú1.54 on Monday, fell further to ú1.49 on Tuesday and lost 13.3% to ú1.29 yesterday. Ironically, the proposal by BarclaysÆ management to shore up capital could well have the opposite effect and leave the London-listed bank on the precipice of disaster if the share price continues to tank.
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