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Barclays protects its bankers' pay

• Robert Peston
• 31 Oct 08, 10:55 AM

Barclays existing shareholders are not universally overjoyed at the deal it has struck with the Abu Dhabi and Qatar.

Apart from anything else, if Barclays had raised the capital from HM Treasury - from all of us as taxpayers - it would have sold the new shares at just above 189p per share (assuming that it could have had the capital on the same terms as Lloyds TSB).

Now that price of 189p is almost a quarter higher than the price which Qatar and Abu Dhabi is in effect paying for 1.8bn new Barclays shares (which they'll receive when the mandatorily convertible notes are converted into shares before June 30 next year).

For the avoidance of doubt, Qatar and Abu Dhabi are paying much less than what was on offer to Barclays from the Treasury, from taxpayers, just over a fortnight ago.

So the wealth of Barclays' existing shareholders has been eroded by the refusal of Barclays to take the money on offer from taxpayers.

And it's worth noting that the Treasury was not undermining the important pre-emption rights of existing shareholders in the way that the deal with Abu Dhabi and Qatar has done.

The Treasury was offering to underwrite the issue of new shares at 189p, but taxpayers would have had the ability to buy the lot at that price.

That's very different from what Barclays has announced today.

Its existing shareholders have only been given the right to buy a fraction of the new equity on offer.

Barclays' big investors (and only the big ones) can today purchase up to 拢1.5bn of the mandatorily convertible notes, which is the equivalent of buying new shares at 153.3p each. They have no ability to claw back the 拢2.8bn of these notes that have been sold to Qatar and Abu Dhabi at that low price.

And, as I said in my earlier note ("Why Barclays prefers Abu Dhabi to GB"), existing shareholders don't get even a crumb of the attractive warrants sold to Abu Dhabi and Qatar with the 拢3bn of reserve capital instruments (these warrants can be converted into 1.5bn new Barclays shares at any time in the next five years, at a conversion price of 197.8p).

What's more Barclays is paying a whacking coupon, loads of income, to Abu Dhabi and Qatar. They get 9.75% on the convertible notes, and 14% (oh so loverly, a time of falling interest rates) on the reserve capital instruments.

And the 14% coupon is tax deductible (and, before you ask, the coupon on the prefs being sold by HBOS, Lloyds TSB and RBS to the Treasury is not tax deductible).

That means we as British taxpayers are subsidising the payment to these oil-rich states to the tune of 拢120m per annum - which presumably won't please Alistair Darling at a time when tax revenues are too tight to mention.

Oh, and by the way, while Qatar and Abu Dhabi are receiving this fat income stream, Barclays' existing shareholders have been told they can't have a dividend for the second half of this year (bye bye to 拢2bn).

So, to re-state the bloomin' obvious, Barclays is paying an arm and a couple of legs for this money from Abu Dhabi and Qatar (with a little bit of a contribution from British taxpayers), when it could probably have paid just one arm and one leg for the money from the Treasury, from taxpayers.

Why has it been so desperate to avoid taking taxpayers' cash?

Well, it wants to avoid making itself vulnerable to being bossed around by the chancellor and prime minister - which it fears would have happened it had taken taxpayers' moolah.

But what's really at stake?

Is this about protecting its right and ability to pay many millions of pounds, even tens of millions, to its superstar bankers?

After all, Barclays - following its takeover of the US bits of bombed-out Lehman - is in some ways more investment bank, more Wall Street, than retail bank these days.

And, famously, Bob Diamond, the head of Barclays Capital - its investment banking arm - has received double figure millions in annual remuneration for some years now.

I've already been rung this morning by sore investors and bankers who allege that Barclays has tapped Abu Dhabi and Qatar because it doesn't want Gordon Brown and Darling putting a ceiling on what it can pay its top execs.

Barclays tells me that it is motivated by a desire to protect its commercial freedom, which is about more than how it rewards its stars, but also includes that cherished freedom.

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Why Barclays prefers Abu Dhabi to GB

• Robert Peston
• 31 Oct 08, 07:34 AM

Some may think it's a funny old world in which would rather raise 拢5.8bn of from the state investment funds and royal families of Qatar and Abu Dhabi than take cash from the .

And the money being raised by Barclays isn't cheap, to put it mildly.

The 拢3bn of so-called reserve capital instruments it's selling to Abu Dhabi and Qatar pay an interest rate of 14% before tax and 10% after tax - only a bit cheaper, after tax, than the preference shares being bought by the British Treasury from other British banks.

But when you include the warrants attached to these reserve capital instruments, it's not obvious that this money is better value than what was on offer from the Treasury.

In some ways it looks pricier - because Abu Dhabi and Qatar have been given the right to buy 18.1% of Barclays shares at any time in the next five years at the current bombed-out share price or 拢3bn in total.

And 拢2.8bn of mandatorily convertible notes give the two buyers a dividend of 9.75%, and the ability to buy a further 33.5% stake in Barclays next June at a discount of a fifth to Barclays' share price over the past couple of days.

So Qatar and Abu Dhabi could together control just under a third of the entire bank.

That's astonishing.

That Barclays can raise the money at all is a testament to its relative strength compared to the other British banks - and in the course of today it hopes to raise another 拢1bn to 拢1.5bn from other investors.

But many jaws will drop at the disclosure that Barclays prefers what some may see as de facto nationalisation by oil-rich Middle Eastern states to nationalisation by Her Majesty's Treasury.

So why was Barclays so keen to pay a fat return to Abu Dhabi and Qatar rather than to the British taxpayer?

Well, unsurprisingly, it puts a high value on its commercial independence.

At almost any cost, it wanted to avoid taking money from the Treasury - because that would have imposed restrictions on how and what it could pay senior executives and when it could resume paying dividends to holders of its ordinary shares.

And taking British taxpayers' wonga would have made it more vulnerable to ministerial nannying that it should lend to those seen by the authorities as deserving.

Barclays has also disclosed that its profits in the first nine months of the year are higher than last year - which puts and , where profits have collapsed, to shame.

And so far Barclays takeover of the US bits of the collapsed Wall Street investment bank, Lehman, seems to be paying off.

Barclays' announcement will be the last bit of relatively good news from a British bank for some time.

Next week we'll have trading updates from HBOS, Royal Bank of Scotland and - and more detail on the capital being raised from UK taxpayers by Lloyds and RBS.

There'll also be more on the takeover of HBOS by Lloyds.

But what may attract most attention will be ghastly results from HBOS and Royal Bank - where the horror story will take a new and scary turn.

We'll see the beginning of the end of the sorry tale of writedowns on subprime and other toxic credit investments, and the start of a long saga of losses (what are known as impairment charges) on conventional lending to businesses and homeowners.

Or to put it another way, the new problem for our banks is that we are careering into a recession that's making it harder for companies and households to pay their debts.

Even Barclays cannot be immune to those looming losses - though, as of now, it can probably allow itself just a small smile of self-congratulation, having avoided putting out the begging bowl to British taxpayers.

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