Royal Bank of Scotland - Rights issue for all the wrong reasons. Shareholders expected to pay for Board's follies
Breaking News 1.45 EDT - Fitch Ratings downgrade RBOS from AA+ to AA
On Feb. 28th , the Royal Bank of Scotland (preferred bank of MI5/6) reported a net profit for 2007 of £7.7 billion on revenue of £28.9 billion, today they have made some of the details of their intended Rights issue available (PDF 22 pages) which Shareholders will be asked to approve at a meeting in mid-May.
They say they need to act fast to improve their finances because of the , "severe and increasing deterioration in credit market conditions, the worsening economic outlook and the increased likelihood that credit markets could remain difficult for some time."
The rights issue has been fully underwritten by Goldman Sachs International, Merrill Lynch International and UBS Limited. Investors can obtain 11 new shares for every 18 shares they now own at 200 pence a share, a 46 % discount from the bank's closing share price Monday 21st April 2008 of 372 pence a share (358 at the close). The precise terms the underwriters have squeezed from their distressed customer have not been published but will necessarily be extremely demanding as it constitutes the biggest raising of shareholder capital ever on the London market. To date we know RBS will pay the banks a fee of £180m, plus a £30m bonus if all goes to plan.
Coincident with this announcement they have provided details of write downs totalling £5.9 billion in assets in this financial year. This includes ;
1 . £1.9 billion on collateralized debt obligations
2. £1.75 billion on exposure to monoline bond insurers
3. £1.3 billion on leveraged loans.
This is on top of the £2.4bn write downs unveiled in February.
... and you can bet your fluffy cotton socks is a wild underestimate and it is plainly evident that the balance sheet accompanying last years results only 5 weks ago was plainly fraudulent. (Note that leveragd loans have bloome to £1.25Bn. as they have been left warehousing Alliance Boots, Brake Brothers and BUPA Hospitals and total loans stand at £12.3 Bn. and it's average write down is 12p in the £.
On top of this the bank has made clear that 2 cash cows, Direct Line and Churchill Insurance are up for sale which could raise up to £4 Bn. (non-core ?)
In a fit of pious banking correctness the bank wish to claim it wants to raise it's current Target ratios of 7.5% to 8.5% for Tier 1 capital and in excess of 6% for core Tier 1 capital on a proportional consolidated (“look through”) basis.
They claim this cash raising exercise will increase its Tier 1 capital ratio to in excess of 8% and its core Tier 1 capital ratio to in excess of 6% on a proportional consolidated basis by the end of 2008.
Furthermore they say that all this well intentioned capital restructuring was ".. the Board’s declared intention to rebuild our Tier 1 capital to the middle to upper end of our historic range of 7% to 8% over a three year period, but in light of the current market environment, this level and timing are considered no longer appropriate."
"In discussions with shareholders it was clear that many of them had reached a similar conclusion, hence today’s announcement that we are launching a rights issue to re-position our capital ratios and strengthen our capital base."
So farsighted are your Board dear Shareholders that , "the Board has concluded that it is now appropriate for RBS to accelerate its plans to increase its capital ratios and to move to a higher target range to reflect the generally weakened business environment."
So what have they been doing whilst they neglected maintaining thier Teir 1 capital ...well they provide a handy list of the "assets" they have been busily buying and pissing away the shareholders funds.
However this does not tell the whole tale for example Monolines. You can see have been written down but reference to Note 4 to this table provides a little more background "Monoline exposures relate to credit protection purchased on credit assets, including CDOs. As the value of the instruments underlying the hedges has fallen, the mark-to-market value of the hedges, and hence of the Group’s exposure, has increased. A credit valuation adjustment of £1,752 million has been estimated reflecting the monolines’ weakening credit profile. Further information relating to exposures to monolines is set out in Appendix II - which tells you the "notional value of these "assets" is £25 Bn. and is now writtten down to £3.2 Bn. of which some £20Bn was intitially graded AAA/AA. That's 3 years record profits pissed away.
Tom McKillop, the bank chairman, presenting this woeful picture tried to suppress the idea that the wankers who got you into this dire position should collect their lunch pails.
"The board unanimously believe that our executive team has all the ability to steer the bank successfully through this tricky period in financial markets," McKillop told reporters. So unanimous that the Directors will be taking uptheir full entitlement (they can do no less) which will cost the spendthrift Fred £856,000. Ouch!!
The bank is already in the final stages of negotiations to sell its stock leasing business Angel Trains to Babcock & Brown for £3.5bn including debt.
RBOS shares closed down 3.9% / 14.5 pence down at 358.00 p RBOS shares are down 47 % over the last 12 months. (Which gives a market Cap. of £35.87 Bn)
Now we have Barclays, HBOS, HSBC and Lloyds to queue up for shareholders (read your pension fund) to throw even more money away. Will it work ? Nobody knows and there will be a lot of crossed fingers in Threadneedle Street tonight - but how low do the shares have to drop before the sovereign funds, the botto feeders see their opportunity ?
What would Mervyn, Alastair and Gordy do if a gang of Sheiks, Chinese money jugglers, dubious Dubai creek traders , Kuwaitis with money burning a hole in their dish dashes, decide to buy themselves one of our Fair City's banks and parcel it out amongst their friends ? Perish the thought.
Oh by the way! , if you are unwise enough to be a shareholder- and you can bet there will be a lot less of them by the time the opportunity to take up this once in a lifetime chance , this years divvy will be in cash , next years interim will be in shares (Ho.Ho.Ho.) and as for the final divvy ...let's wait and see if something turns up.
DECLARING AN INTEREST : Lord and Lady Patel have some of their millions lodged with this bunch of wankers
UPDATE Wednesday RBOS shares plunge a further 5.24% , 18.75 down at 11.00 BST at 339.25