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HBOS and RBS made their announcements a little while ago. Last week was slightly less expensive for hapless holders of bank shares. Bradford & Bingley, low in the second division of this industry, went for £300 million, a comparatively modest sum, but the maximum the market would bear. Barclays, which issued a routine trading update, passed up its chance, prompting one analyst to send out a memo headed ‘In denial’.
These are rights issues. They are a well-established method for raising new capital from shareholders. But as we shall see, these banks have given them a novel twist at shareholders’ expense. RBS is, as it were, the Big Issue seller, asking for your spare £12 billion, easily a record, and the sob story that accompanies it is a fine demonstration of how hubris is so often followed by nemesis.
Last year RBS gatecrashed the merger party Barclays had organised with the Dutch bank ABN Amro. Barclays proposed to pay with shares, but RBS came in with cash, supported by a couple of heavies, Fortis of Belgium and Santander of Spain. Long before this bid reached the point of no return, it looked like a big mistake to outsiders. Its one obvious attraction was ABN’s American bank, LaSalle, which fitted neatly into Royal Bank’s jigsaw of acquisitions in the US north-east, but ABN sold it before RBS could stop them. Nevertheless, the bid went ahead, in rapidly deteriorating credit conditions, on the thin justification that ABN’s wholesale bank would be rammed into RBS’s amid a shower of efficiency gains.
Hardly anyone outside the RBS citadel believed this modest prize justified the huge risk involved in paying out so much precious cash when every other bank was trying to conserve it. Yet RBS sailed on, seemingly oblivious to the storm. It even raised its final dividend, in what looked like a two-fingered gesture to the bears.
Well, they’ve had their picnic now, all right. The RBS rights issue is only one step short of a rescue. Shareholders are being offered 6,123,010,462 (count ’em) new shares in the ratio of 11 for every 18 owned, at 200p apiece. 200p! This bank’s management (slogan: ‘make it happen’) used to moan that their shares were cheap at thrice the price, and that the market just didn’t see what a brilliant lot they were. Now we can see that, far from being brilliant, they have destroyed shareholder value on a massive scale. The bank’s insurance businesses, Direct Line and Churchill, are up for sale. The dividend is being slashed even before the raised final has been paid, and to add confusion to insult, the next one will be paid in shares, a meaningless irritant which is presumably designed to cover the banker’s blushes and their now-desperate need to conserve cash.
Oh, sorry, I forgot. Bankers don’t do blushes. For another example, let us turn back to HBOS and its half-million small shareholders. They are being offered two new shares for every five they own, at 250p a time. Following the bad example of RBS, HBOS is also slashing the dividend and making the next payment in penny-packets of shares. For thousands of holders, these new ‘free’ shares will be about as valuable as points on a Tesco Reward card, and a lot harder to turn into something useful. If they feel they have been treated with contempt by their directors, they’re right.
The treatment could be costly, too. You may not have the money to buy the new shares, but if you ignore the cash call, your rights will be sold for whatever they will fetch. You’ll get a cheque — but beware, it will count as a partial disposal for tax pur-poses. The third way, of selling enough nil-paid rights shares to take up the balance (‘tail-swallowing’ in the jargon) maintains your investment, but is expensive in dealing costs for small shareholders.
It’s time to name names. At RBS, chairman Sir Tom McKillop is relatively new, the audit committee chairman is a (Scottish) accountant you’ve never heard of, and the board is dominated by the Scottish mafia. No one has the authority or gumption to challenge Sir Fred Goodwin, the chief executive. So powerful is he that it often looks as though the idea of succession planning has never crossed the directors’ minds.
At HBOS, the chairman is the immensely experienced and well-connected Lord Stevenson. Like McKillop, he’s not a banker, but then neither is chief executive Andy Hornby. He came from Asda a couple of years ago. Perhaps Hornby is smarter than the rest of us and can understand the eye-poppingly complex derivatives of US debt which have brought HBOS to this pass. The evidence is not compelling. Perhaps he thought, like most of us, that Halifax was a mortgage bank, taking money from depositors and lending it to homeowners.
Now it, too, is slashing the dividend. Are the directors sorry, or even embarrassed? Not so you’d notice: ‘Year to date,’ said Cheerful Andy as he socked the shareholders for £4 billion, ‘the trading performance of the group has been satisfactory.’ He then drivelled on interminably about ‘a step change in our capital strength and target ratios… to consolidate our competitive position in our core markets’, for all the world as if this was just a bit of routine financial housekeeping.
Well, sorry is the hardest word — except perhaps ‘resign’ — and the banks had found a novel way of rubbing shareholders’ noses in it instead. A conventional rights issue is priced close to the prevailing market price, at a discount of less than 20 per cent, and the dividend is maintained on the enlarged capital. The issue is underwritten by a bank (or several) before the bank in turn tries to arrange for it to be sub-underwritten among long-term institutional shareholders. This mechanism means the bankers must earn their fees, since the sub-underwriters will ask the hard questions before they agree. In other words, the reasons for the issue and the financial logic will be thoroughly explored. Then, if the shareholders don’t like it, the shares are left with the underwriters, but the existing shareholders are not diluted too badly.
Both RBS and HBOS are offering shares at deep discounts of more than 40 per cent to the market price. Even on the slashed dividends, the subscribers are getting a yield of around 10 per cent on the new shares (the old ones will fall in value, so don’t think you’re getting something for nothing). No need for that expensive underwriting, then, you might think. You’d be wrong. Both issues are underwritten, even though the share prices would have to collapse afresh to leave the nil-paid shares worthless. There are no realistic circumstances where that could happen. Were the RBS price to fall below 200p, it would have a market value of £33 billion, including the £12 billion of new money, implying a value of the bank before the issue of just £21 billion — about two thirds of what i t is today in like-for-like terms. The underwriting commissions, amounting to over £200 million, are simply money for old rope. The payment is a bung to the bankers’ mates in other institutions, and it comes straight out of shareholders’ pockets.
The danger is that they’ll all be at it. Lloyds TSB passed up the chance to join in earlier this month, but Barclays refused to rule it out. Its chairman, Marcus Agius, an immensely experienced and upright City banker, considers the actions of his competitors to be very poor form, so if Barclays does in due course ask for more, we can look forward to better behaviour. Just don’t expect an ounce of contrition from RBS and HBOS.
Neil Collins Is A Columnist For The London Evening Standard.
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