RBS considering sale of Direct Line and Churchill
The Royal Bank of Scotland has confirmed that it will call on shareholders to help it raise £12 billion and that it is considering the sale of its insurance firms Churchill and Direct Line.
The banking group says it plans to launch a rights issue to raise £12 billion in order to plug estimated write-downs of £5.9 billion before tax caused by its exposure to the credit markets.
It says it also needs to sell £4 billion of assets and is therefore looking to offload all or some of its insurance arm.
RBS says a rights issue has been on the cards for some time, but that the “increasing deterioration in credit market conditions, the worsening economic outlook and the increased likelihood that credit markets could remain difficult for some time” have forced it to accelerate these plans.
A rights issue allows floated companies to issue additional shares in order to raise money. The shares are offered to existing shareholders in proportion to their current holding.
RBS’ proposed rights issue will see 11 new shares issued for every 18 existing shares at a cost of 200 pence per share. This means shareholders will receive a discount of 46.3% on shares, which were priced at 372.5p on 21 April.
The issue is unlikely to progress any further until after May, when shareholders will meet to discuss the terms.
Simon Denham, managing director of Capital Spreads, says the rights issue by RBS is likely to be the first of many, with other banks waiting in the sidelines to follow suit.
He adds: “There is an argument that says: ‘better to get it done first and tap the liquidity before the others’ but on the other hand there is the, understandable sentiment that would have investors think: ‘better to get in on the last one which will at least come in at the bottom of the cycle’.
“It is difficult to get excited about buying something when you know that there may be more along the way.”
A way a company can raise capital by creating new shares and invite existing shareholders in the company to buy these additional shares in proportion to their existing holding to avoid a dilution of value, which means keeping a proportionate ownership in the expanded company, so that (for example) a 10% stake before the rights issue remains a 10% stake after it. As an added incentive, the new shares are usually offered below the market price of the existing shares, which are normally a tradeable security (a type of short-dated warrant) and this allows shareholders who do not wish to purchase new shares to sell the rights to someone who does.