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Barclays pays a high price for independence

Created:

13 November 2008

Written by:

John Adams

For bank investors, the new world of part nationalised high street lenders holds few attractions. The move may have stopped the financial system from collapsing, but investors can probably kiss goodbye to cash dividends for years to come at those lenders that have taken the state's cash - HBOS, Royal Bank of Scotland and Lloyds TSB. And the prospects of political interference in bank lending decisions could create an even worse bad debt headache for the future.

Amidst all this gloom, however, Barclays stood out. Whilst the bank certainly accepted the need to raise more capital, its management ruled out government help. Management's motives are open to debate, of course. After all, Barclays' president, Bob Diamond, earned £20m in cash and shares last year. Such "fat cat" pay packets would prove hard to sustain after taking taxpayers cash, doled out by a Labour government. For whatever reasons, though, Barclays' decision to decline state help looked like great news - it would surely allow the bank to go on paying cash dividends, poaching other banks' executives with generous remuneration, and avoiding potentially bad quality politicised lending.

But the alternative has proved little better. Barclays' shareholders discovered the true price of independence after management negotiated a £7bn capital injection last month that would see about a third of the bank pass into the hands of new investors from Abu Dhabi and Qatar. Specifically, Barclays is issuing £3bn in reserve capital instruments to the Qatar Investment Authority and Abu Dhabi royal, Sheikh Mansour Bin Zayed Al Nahyan, paying a chunky 14 per cent interest rate (that's even higher than the 12 per cent that HBOS et al are paying to the Treasury). The Middle East group is also buying £2.8bn of convertible shares, which convert into ordinary shares next summer, along with warrants.

All of this is very dilutive for existing shareholders, who can't participate on such generous terms, and some are starting to think that independence is being bought at too high a price. Indeed, earlier this week Aviva, which owns 5 per cent of Barclays, is understood to have said at a meeting of the Association of British Insurers that it is ready to vote against the deal at the extraordinary general meeting on 24 November. Others appear to share that view.

Barclays has indicated that it's willing to explore a compromise. But, if a compromise can't be found, then Barclays might end up looking for capital elsewhere - and finding alternative investors won't prove easy. It's not inconceivable that Barclays may even need to return to the government for funds. If it does, it's thought likely that the cost of public funding will be higher than it would have been had Barclays joined other UK banks last month in accepting government money.

True, plenty would have to go wrong before that happens. But those who had been looking to Barclays as the way out of an increasingly state-controlled UK banking sector might first want to wait and see how this particular spat turns out.

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