Government takes majority stake in RBS
The government has taken a 58% stake in the Royal Bank of Scotland after shareholders rejected the banking group’s £15 billion share offer.
In a statement this morning, RBS said that only 0.24% of new shares offered to investors were taken up, leaving the government – and the taxpayer – to pick up the remaining 22.9 billion shares and take control of 57.9% of the bank.
Shareholders had little incentive to buy the new shares in RBS as they were trading at 55.10p on the run up to the cash call – well below the offer price of 65.5p. The bank will now receive a total of £20 billion from the taxpayer, made up of £15 billion in ordinary shares and £5 billion in preference shares.
"We regret that existing shareholders did not take up their pre-emptive rights but understand that market sentiment towards the banking sector made this uneconomic in the short-term," Stephen Hester, the new chief executive of RBS said.
The sale of shares in RBS is part of the government's £37 billion bailout of banks who have been hit hard by the credit crunch.
Back in April RBS announced a £12 billion rights issue to bolster its balance sheet, the largest the UK has ever seen. It recently announced that it had made losses totalling £206 million from sub-prime debts, on top of the £5.9 billion lost in the first six months of the year.
The shares will be in the hands of a newly-created company, UK Financial Investments (UKFI), which is owned by the Treasury. However the government has described UKFIL as being at run at arms length from it.
Both Lloyds TSB and HBOS will ask shareholders to buy £13 billion of new shares taxpayer in the coming weeks.
However, with following Bradford & Bingley's nationalisation - despite a rights issue - shareholders in these banks may fear losing their money.
UK Financial Investments
The UKFI was established on 3 December 2008 to manage the government’s investments in financial institutions, including the Royal Bank of Scotland (RBS), Lloyds TSB/Halifax Bank of Scotland (Lloyds Banking Group), Northern Rock and Bradford & Bingley. The aim of UKFI is to protect the UK taxpayers’ investment in these companies and to help the companies “create value” so the government’s shares in these companies can be gradually sold back into the market at a profit. As an idea to how big an exposure the UK taxpayer has, if the government’s stake in these banks falls 1%, this is equivalent to the annual defence budget of £37bn and a 3% fall is the NHS budget of £110bn.
All sub-prime financial products are aimed at borrowers with patchy credit histories and the term typically refers to mortgage candidates, though any form of credit offered to people who have had problems with debt repayment is classed as sub-prime. Depending on the lender’s own criteria, sub-prime can apply to borrowers who have missed a few credit card or loan repayments to people who have major debt problems and county court judgments (CCJ) against their name. To reflect the extra risk in lending to people who have struggled in the past, rates on sub-prime deals are typically higher than for “prime” borrowers.
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.