Summary
It's hard to fathom that "Fred the Shred's" (known for his brutal cost-cutting in the past) role in the battle for ABN-Amro between Barclays may have led to RBS's plans to raise the largest cash call of British banks of $20 billion+ in a 1-for-2 basis "rights issue" to raise capital and shore up its balance sheet. RBS may also sale its business unit Angel Trains for $6.9 billion to raise capital. RBS has already wrote down over $3.3 billion on the value of mortgage-backed securities, loans to private equity groups and securities guaranteed by bond insurers who are cash strapped. RBS finds itself in a peculiar predicament with low capital levels in part due to the massive acquisition of ABN-Amro in 2007, which ate up a lot of its cash. RBS's Tier 1 Capital Ratio is 4.5%, (the number regulators look for to determine a bank's financial strength) which is the lowest of any British bank and falls under the threshold where regulators can intervene and force banks to recapitalize.
Analysis
RBS is scheduled to announce its "rights issue" to raise $20 billion or more to recapitalize. Questions loom whether RBS paid too much for ABN in 2007 when RBS issued 6.84 billion shares and paid $30 billion to finance its portion of the deal or whether federal regulators strong armed RBS to participate in the $99 billion government backed package to allow banks to swap assets to alleviate the strain on their balance sheets due to the mortgage crisis spillover to Europe. RBS is also shopping other business units, including Angel Trains, DirectLine and Churchill to recapitalize and shore up its balance sheet.
1. Sir Fred Goodwin's about face and insistence in February 2008 that RBS wouldn't need to raise more capital has left some shareholders miffed and Goodwin will have to explain his actions at RBS's Annual Meeting on 4.23.08, to discuss RBS's planned "rights issue," among other things
2. British banks are under a lot of pressure from the Government and the Bank of England is putting pressure on British banks to raise their capital levels and to come clean about the magnitude of their writedowns
Takeaway: RBS's "rights issue" will be sold at a discount of 30-40% of its current share price and because RBS plans to raise more than 5% of its market value, RBS shareholders must approve the rights issue and Sir Fred Goodwin will seek approval at its Annual Meeting on 4.23.08. If the rights issue goes forward it will be Britian's largest cash call on existing investors and RBS may be raising so much to get it over in one go. Sir Fred Goodwin may be in the hot seat on 4.23.08, at RBS's Annual Meeting and for now he keeps his job!
