Was This Panic Dealmaking By Barclay's?

Today, a fascinating post by Robert Peston on BBC. First, a refresher:

"Wednesday, October 29, 2008

"Barclays non-governmental recapitalisation efforts don’t exactly appear to be thundering forward."

Interesting post on Alphaville about banks not taking bailout money and how they're doing in getting investment:

"To bailout or not to bailout…

Barclays non-governmental recapitalisation efforts don’t exactly appear to be thundering forward. In the US, meanwhile, as observed by footnoted, banks’ are exhibiting some peculiarly similar recap-PR lines:

NorthernTrust put out a press release yesterday to announce its $1.5 billion infusion because it “fully supports the U.S. government’s efforts to strengthen our nation’s financial system.” There’s also this one from Valley National: “Although Valley is a well-capitalized organization, we believe such a program provides an excellent opportunity for healthy strong banks like Valley to participate in and support the recovery of the U.S. economy”. Even relatively small banks seem to be on message, like First Niagara which said in its press release yesterday, “We are supportive of the Treasury Department’s efforts and remain strongly committed to supporting the economy in Upstate New York.”

Banks’ boards, indeed, face quite a tough call when it comes to using government money. The below has been sent to us from Hilary Winter - a partner at Orrick:"

Do read the whole post."

So, Barclays is attempting to weather this turmoil without government largess, but was having a rough time of it. Next:

"Monday, November 3, 2008

"But governments were implicitly underwriting the financial system all along. They still are."

Here's another interesting post on the FT:

"Not exactly a private solution. Indeed, even if Barclays is not owned in some part by the UK government, it will still be guaranteed by it – and that matters.

Last month, the UK government asked banks to fortify themselves against further financial shocks by increasing their capital cushions, in return for which it would offer new guarantees on inter-bank lending. To help the banks to raise new capital, the Treasury offered to buy preference shares, albeit only on onerous terms; some hoped that the banks would seek alternatives. This is what Barclays has done."

The British plan is:

1) Banks must increase capital ( The big problem )

2) Government guarantees inter-bank lending ( The resulting problem )

3) Government buys shares in banks ( Seems reasonable to me. Better deal for taxpayers )

4) Terms of loan to be onerous ( Absolutely necessary )

5) Would prefer private solution ( Absolutely )

So, in the U.K., the terms on the loans from the government were thought to be onerous. Really:

"It is striking that these investors are charging more than the UK government’s punitive rate. Given that sovereign wealth funds’ earlier investment in financial institutions have resulted in heavy paper losses, it is hardly surprising that the Gulf royals have driven a hard bargain.

Ultimately, it is for shareholders to decide whether to back this deal. There can be no doubt Barclays is paying a heavy price for a measure of independence."

Now note this:

"The bank, however, is still not entirely independent. One of the great fictions of recent years was that large banks could be allowed to fail and had no state guarantees. But governments were implicitly underwriting the financial system all along. They still are. Regardless of who owns the shares, the UK Treasury must make sure that its large banks are stable – and it has a duty to intervene if they are not.

The Gulf deal has reduced risk for the UK government; in the event of problems, new shareholders will lose out before the exchequer. But Barclays is much too big to fail, and the government would be forced into a rescue if the bank were seriously to stumble. The government may not be in the boardroom but it must keep a watchful eye."

Absolutely. This fiction has been the main point on this blog since the beginning of this crisis. The guarantees are still there. I've already explained what we can do going forward, but it's at least becoming clear to everyone that these guarantees were in place. It only remains to examine how they factored into this crisis."

So, Barclays found outside investment, even though, as my post claims, their ultimate guarantor is the government. But they paid more for the private deal than the government deal would have cost. Once again, they paid a premium to remain independent. But, did they act prudently in this deal, or rush to get it done to stay out of the government's clutches? You tell me. From Peston:

"Here's what you need to know.

When Barclays only 19 days ago sold £3bn of these Reserve Capital Instruments (RCIs) to Qatar and Abu Dhabi, it threw in warrants to purchase 1.5bn new Barclays shares at any time in the next five years at a price of 197.775p each.

According to Sandy Chen of Panmure Gordon, each of these warrants is worth around 16p, which would value the lot at just under £250m (and, by the way, some analysts have argued that the warrants are worth a good deal more than this).

They were apparently an important sweetener to persuade Qatar and Abu Dhabi to buy the RCIs. What's more, Qatar and Abu Dhabi were also paid a £60m commission in cash for taking the RCIs.

In other words, Qatar and Abu Dhabi were paid a bit more than £300m for buying £3bn of securities - and these securities pay a stonking 14% rate of interest until June 2019 (many of us would love a bank to pay us that kind of interest).

So, Qatar and Abu Dhabi got a good deal. So what?

"Here's the thing.

Other investors yesterday bought £500m of the RCIs without the inducement of the warrants or the cash commission.

Perhaps unsurprisingly, although Qatar and Abu Dhabi were prepared to release £500m of the warrants for sale to other investors - following complaints from British investors that they should have been offered these in the first place - the Gulf investors didn't give back any of the commission or warrants.

Qatar and Abu Dhabi therefore ended up being paid over £300m for taking even less risk on their investment in Barclays.

It's worked out very nicely for them indeed. Now there's a proven appetite for these RCIs, they could presumably sell the rest on the open market, should that be appealing to them. In which case, the £300m would become pure profit attached to zero investment risk.

So why on earth did Barclays less than three weeks ago feel it had to pay so much money to Qatar and Abu Dhabi, to persuade them to buy these securities?

Well, it points out that market conditions were fraught at the time.

But there was no urgent rush to raise the money. As Barclays told me back then, the Financial Services Authority had given it till early next year to raise the capital it needed.

Arguably therefore Barclays has needlessly given away £300m."

That doesn't sound good.

"Could the board make amends? Well Barclays' four executive directors have volunteered to forego their bonuses.

But they would probably have to do without bonuses for around 10 years to compensate for the shareholder wealth given away in this transaction.

Which means that the decision by the board to offer itself up for re-election may turn out to be more than a symbolic gesture.

In particular, there is likely to be pressure on the chairman, Marcus Agius, to explain why he and the non-executives permitted the deal with Qatar and Abu Dhabi to be transacted on such generous terms."

I should hope that they are called to account. But, I also want to file this one, unless otherwise informed, under panic selling or dealmaking. I simply wonder how much, in retrospect, of this kind of panic will turn up.