Barclays set to join Treasury insurance scheme?
Barclays is looking at taking part in the Treasury's toxic debt insurance scheme, a move that would see it accept financial help from the government for the first time.
So far, Lloyds Banking Group and Royal Bank of Scotland have signed up to the Asset Protection Scheme, the Treasury's latest proposition to help get banks lending again. The scheme works by offering banks insurance against any write-downs they may have to make as a result of 'bad' debt stored on their balance sheets. In return for a fee and a commitment to increase their lending, the Treasury will shoulder a proportion of the debt.
Both Lloyds and RBS were already receiving government handouts prior to signing up to the scheme; the Treasury was forced to buy unwanted shares from Lloyd's failed rights issue giving it a 43% stake. Similarly, the government was forced take a 58% stake in RBS after shareholders rejected the banking group's £15 billion share offer.
In contrast, Barclays has yet to accept any money from the government and remains fully independent. Instead, last October, it sought out funding from Middle Eastern investors as part of its efforts to boost its capital ratios by £7.3 billion without using the government's rescue programme.
However, the banking giant has now confirmed rumours that it was is discussions with the Treasury regarding its potential participation in Asset Protection Scheme.
In a statement to investors, the bank says: "Barclays decision whether and to what extent to participate in the scheme will be based on the economic merits to shareholders of any such participation." In January, Barclays delivered better than expected financial results and reiterated claims that it does not need any government money to survive the slump.
In a further twist, Barclays also confirmed that it is in talks to sell its iShares business - part of its Barclays Global Investors division - with some analysts predicting the sale could reach £5 billion.
Analyst opinion is divided as to whether a completed sale would provide enough capital to stave off Government intervention, or if the funds would give it the money to pay for entry to the insurance scheme.
Shares in the group soared by almost 30% after the banking giant revealed that its annual pre-tax profit for 2008 would come in above market expectations of £5.3 billion despite £8 billion worth of write-downs on credit market exposures and leveraged loans.
In an open letter to investors, chairman Marcus Agius and chief executive John Varley said that the bank does not require further cash from shareholders or the government to shore up its capital position.
They added that current trading is healthy and "got off to a good start in 2009".
Agius said in the letter: "These figures demonstrate that although we have been heavily impacted by the credit crunch, our income generation was at a record level in 2008 and has enabled us to withstand this impact and still produce strong profits."
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.