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HBOS says independence equals nationalisation

• Robert Peston
• 14 Nov 08, 04:45 PM

HBOS's board has this afternoon explained why it sees the independence of the bank as a highly unattractive option.

In a document sent to shareholders about its plan to raise 拢11.5bn of new capital and to be taken over by Lloyds TSB, it says that it would need to raise more capital were the deal with Lloyds to collapse, by order of the City watchdog, the Financial Services Authority.

What HBOS calls a "preliminary indication" from the FSA - given a few weeks ago - was it would need to raise 拢12bn as an independent bank, a 4.3% increase on the amount HBOS is currently raising.

But HBOS fears it may have to raise rather more and on worse terms, were it to go back to the Treasury at this later stage and reopen negotiations on the fund raising. It tells shareholders there is no certainty about quite how much additional capital it would need to raise.

The letter to shareholders from HBOS's chairman, Lord Stevenson, is pretty alarming, It warns that independence could lead to "the loss of private sector status", or de facto nationalisation.

HBOS fears that all the increased capital would probably have to come from taxpayers - and that would give the state a large majority shareholding in the bank, perhaps of 70% or more.

Which explains why HBOS has rejected calls from the prominent Scottish bankers, Sir George Matthewson and Sir Peter Burt, for HBOS to remain independent.

UPDATE 06:00 PM

Some, such as Burt and Matthewson, will say that HBOS doth protest too much about the risk of the business losing its private sector status and becoming a nationalised bank.

After all, HBOS has confirmed what Burt and Matthewson contended, that the FSA had originally said that an independent HBOS would need only a few hundred million extra pounds of capital.

So for HBOS's case to be taken over by Lloyds to remain totally and utterly compelling, its chairman Lord Stevenson needs to demonstrate that he is right to fear that the FSA would now demand that the bank raise more capital and also that the Treasury would provide this capital on worse terms.

Shareholders may insist that he prove that he is not being alarmist.

Which in turn probably requires that the Treasury and the FSA both come out of purdah and state precisely how much capital they would want an independent Lloyds to raise and also the price of that capital.

PS This is the important part of the HBOS document:

7. Importance of voting

The HBOS Board unanimously recommends that shareholders vote in favour of the resolutions required to implement the Recommended Transaction.

It is important that all of the Resolutions are passed by the requisite majorities. This is because the Capital Raising and the Acquisition are interconditional and, together, they form the Recommended Transaction proposed and unanimously recommended by the HBOS Board.

If the Resolutions are not passed, none of the Acquisition, the Placing, the Open Offer or the HM Treasury Preference Share Subscription will proceed, and HBOS will be required to find alternative methods of increasing its capital base, and funding its business. On 11 October 2008 the FSA gave a preliminary indication to HBOS that if the Acquisition were not to occur, it would require HBOS to raise 拢12 billion of additional capital, made up of 拢9 billion of HBOS Shares and 拢3 billion of HBOS Preference Shares.

However, whilst HBOS would seek to raise additional new capital in those circumstances, there can be no certainty that the amount required would not be more than 拢12 billion or that HBOS would be able to successfully raise capital or as to the terms on which capital could be raised, including the terms of any participation by HM Treasury in any capital raising, or as to whether such fundraising would be on a pre-emptive basis. There can also be no assurance that HBOS would be successful in increasing its capital to the levels required to qualify for access to the Proposed Government Funding arrangements or to satisfy the requirements of the FSA on an ongoing basis.

This could result in an increase in funding costs arising from any credit rating downgrades or increased reliance on Government supported liquidity schemes; contraction of HBOS's balance sheet; and a longer time horizon than the one contemplated by the Recommended Transaction for the resumption of any dividend payments on HBOS Shares. Any capital raising might also be more dilutive and is unlikely to be available within the same time period as the Recommended Transaction.

There can be no certainty as to sources of capital if the Resolutions are not passed. The HBOS Directors would expect the UK Government to take appropriate action consistent with the policy objectives set out in HM Treasury's announcement of 8 October 2008 on Financial Support to the Banking Industry, which are to ensure stability of the financial system, and to protect ordinary savers, depositors, businesses and borrowers. Such action may include the issuance to HM Treasury of HBOS Shares on a basis which could be more dilutive to HBOS Shareholders than the Placing and Open Offer and the issuance to HM Treasury of other securities on terms less economically advantageous and more restrictive than the HMT Preference Shares or the loss of independent or private sector status for HBOS. The occurrence of any such action may cause the value of HBOS Shares to decline substantially with negative implications for HBOS Shareholders.

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Barclays and British investors

• Robert Peston
• 14 Nov 08, 12:00 AM

For reasons I explained a fortnight ago, Barclays shareholders don't like the way it's chosen to raise 拢5.8bn from the state funds and royals of Qatar and Abu Dhabi (see my note, "Barclays Protects its Bankers Pay").

Traditional British investment institutions don't like the substantial commissions paid to Qatar and Abu Dhabi to obtain the money (拢172m in commissions and 拢66m in fees - and the commission would be payable even if the deal was blocked by revolting shareholders in Barclays).

Some existing Barclays shareholders think the interest rates on the novel securities being sold are too high. And they hate the way that the two Gulf states are receiving a generous dollop of warrants that convert into shares.

Put simply, they think Qatar and Abu Dhabi have been sold a stonkingly good deal, at the expense of long-suffering British pension funds and insurers.

Many of these investors simply can't understand why Barclays refused to raise the vital capital from British taxpayers, since the money being offered by HM Treasury to our battered banks looked considerably cheaper.

But although the deal with Qatar and Abu Dhabi leaves them feeling queasy, it's very dangerous for shareholders to reject the plan and deprive Barclays of the money.

Which is why, , RREV - the leading shareholder advisory service - is recommending that shareholders abstain when the fund-raising comes up for a vote on November 24 rather than vote it down.

That said, Barclays wouldn't be at risk of going bust if shareholders forced it to cancel the deal - because the Treasury has promised that all major British banks can raise the capital they need from taxpayers.

But my understanding is that HM Treasury would not provide the money as cheaply to Barclays as would have been the case only a few weeks ago - because it feels market conditions have changed (and it's also miffed with Barclays for implying that British taxpayers' money comes with horrendous strings attached - an insinuation that has embarrassed the banks that are taking shillings from the public purse).

So it probably wouldn't be rational for Barclays to go back to the chancellor with its cap out-stretched.

Is there nothing Barclays can do to placate recalcitrant British investors?

Well it could offer them an extra 拢1bn each of the two kinds of securities sold to Qatar and Abu Dhabi (they've already been sold 拢1.25bn of one class of the new securities on offer).

Barclays wouldn't have to underwrite this 拢2bn, because it would be nice-to-have money, rather than must-have money.

I suspect that pension funds would be ecstatic to be given the chance to buy some of Barclays' so-called Reserve Capital Instruments, which pay an annual coupon of 14% till June 2019 and have warrants attached to purchase shares at 197.775p.

Wouldn't you fancy being offered interest of 14%, with what's known as an "equity kicker" thrown in for nothing?

In fact, I've been contacted by Barclays' customers saying that they'd love it if the bank would pay them 14% interest.

If Barclays offered this investment to its millions of savers (which is not going to happen, so don't get your hopes up), there could well be a stampede to buy the stuff.

These Reserve Capital Instruments are, of course, riskier, than money held in a bank savings account.

But most of us are prepared to take a bit more risk for a bit more return - and that 14% rate, plus warrants, is a wonderfully healthy reward for risk.

UPDATE 11:49

I have just received a copy of the advice given by the Association of British Insurers to its members on how they should vote on Barclays' capital raising.

Unsurprisingly, it raises concerns about the cost of the money being raised, and signals discontent that the securities were not offered in a conventional way to existing shareholders.

The ABI's note is marked with an "amber" top, which means that it rates the deal as irksome rather than scandalous.

But, it also says that its assessment is "pending" - which implies that the "amber" may yet change.

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