RBS reports strong take-up of rights issue
The Royal Bank of Scotland (RBS) has thrown down the gauntlet for those banks hoping to raise money from selling shares to investors at a discount to help them weather the effects of the global credit squeeze.
The bank, the first in the UK to issue shares for investors, has reported that it has already sold more than 95% of its £12 billion target.
Last month, RBS announced that it desperately needed to raise the capital, just months after chief executive Fred Goodwin said it did not need to. Not only has RBS been hit particularly hard by the ongoing credit crunch, but also by last year's £60 billion acquisition of the Dutch bank ABN Amro.
Meanwhile rival lender the HBOS group, which includes Halifax and Bank of Scotland, is also planning a £4 billion rights issue. With over two million shareholders, HBOS has the biggest non-institutional shareholder base in the UK. Bradford & Bingley also has a rights issue pending.
Philip Pearson, of Southampton-based IFA P&P invest, says that rights issues can be both good and bad news for investors. “In the medium to long-term, investors can profit as they are buying at a discount and share prices will recover.
"However, for those shareholders that need cash now I would urge them not to accept as it will provide them with a cash settlement.”
Rights issues are generally frowned upon by shareholders, because it means that their investments are diluted, the firm's earnings are spread more thinly and each share takes a smaller slice of the company's profits.
Shares in HBOS dropped 7% yesterday, while shares in Barclays and the Royal Bank of Scotland also suffered falls of 5%.
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.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.