Barclays Ask Shareholders to Come up with £6 billion

Barclays Bank in the UK has been told by the Bank of England that it needs to fill the shortfall that amounts to £12.8 billion in capital as the finances of the major British bank show signs of being worse than had previously been thought. As a result, the bank is asking shareholders to stump up at least £6 billion and the race is on to comply with obligations imposed by the Bank of England.

Bank of England

The call for cash will take place in September through a rights issue and is higher than expected. The new requirements of the Bank of England concerning leverage ratio (or the debt-to-equity ratio) mean that banks will have to increase leverage ratio to 3%. Only yesterday, Barclay’s Chief Executive Officer, Antony Jenkins announced that it was expected that the bank would be forced to launch a program to raise capital that amounted to £5 billion. Up until now, Jenkins had tried to staunchly refuse the demands by the Bank of England to reinforce the finances of the bank. Shares closed on Monday night at 3.5% lower (309.05p). Analysts had already predicted that the £5 billionannounced would be nowhere near enough and it would be necessary to raise at least£7 billion in extra capital and thus increase leverage ratio to 3% (from 2.5%). Shares fell by 6.84% today on the London Stock Exchange (down 21.150p to 287.900p) in the wake of the announcement.

Discussions with the regulatory body of the Bank of England (the Prudential Regulation Authority) took place today and the result is that Barclays is under the obligation to raise capital to increase that leverage ratio by raising £6 billion.

Jenkins stated: “After careful consideration of the options, the board and I have determined that Barclays should respond quickly and decisively to meet this new target. We have developed a bold and balanced plan to do so”. But, the £12.8-billion shortfall is double what the markets had been expecting and comes as a decisive shock today revealed in the plunging of the shares of the bank on the London Stock Exchange.

The cash call will be fixed at 40% discount with regard to Monday’s 309.5p share-price level and investors will be offered therefore a share at 185p (for every four that they hold already). Thus, the bank will be able to raise £5.95 billion through the rights issue. This sum will be reduced to £5.8 billion after having paid out the fees for the guaranteeing of the cash call by investment banks. £2 billion will come from bond holders according to the statement by the bank. Barclays has also agreed to retain more profits in the future.

The bank seems to have looked into other possibilities in a hope that it would not repeat the same mistakes that were made in the financial crisis in 2008. At that time the bank looked for cash through investors in the Middle East and raised £7.3 billion, while investors in the UK were not even given an opportunity to do so. The raising of that capital via the Middle East is being investigated at the present time by the Financial Conduct Authority at the Serious Fraud Office as there is the suspicion that it lent money to Qatar Holdings (which was used to fund its participation in the cash call). The Serious Fraud Office has only just received an extra £2 million to fund the investigation to determine whether or not the bank used its shareholder money to get a third party to buy its shares. The capital that was raised meant that Barclays avoided being taken over by the UK government like the Royal Bank of Scotland.

PRA

The regulatory body of the Bank of England, the PRA, has agreed to back the capital plan put forward by Barclays. This is primarily because it does not involve cutting back on lending in the economy. Barclays has to comply with the leverage ratio by June 2014 now (which is already much later than the previous date imposed of the end of 2013).

Jenkins  added that “The board and I are aware of the implications of a rights issue for shareholders. We hope to balance this reduced uncertainty in the outlook for Barclays and with enhancement of our dividend policy from 2014”.

But, will this mean that Barclays will look like a good investment opportunity in the future?