The government yesterday moved to shore up Lloyds TSB�s takeover of HBOS by setting out stringent terms for any alternative capital raising while Barclays sought to mollify shareholders unhappy with its cash call.
The government yesterday moved to shore up Lloyds TSB's takeover of HBOS by setting out stringent terms for any alternative capital raising while Barclays sought to mollify shareholders unhappy with its cash call by giving them limited access to the fundraising.
Chancellor Alistair Darling, in a written statement to Parliament just 24 hours before today's vote by Lloyds TSB shareholders on the deal, appeared to target Sir George Mathewson and Sir Peter Burt who want to keep the Edinburgh bank independent, with a set of requirements for any future government-backed capital raising.
He warned any share issue would be at a discount to current share prices, said interest rates on preference shares could be higher than those already announced and set conditions on banks' business plans and access to funding.
Burt, former chief executive of HBOS, and Mathewson, former Royal Bank of Scotland chief, have argued that a standalone HBOS could draw on government funds.
But Darling sought to close this avenue, warning there is "no automatic right of access to the recapitalisation scheme".
He said any share offer underwritten by the government would be at a discount to either the prevailing market price or the original placing price, whichever is lower.
HBOS's current share offer is priced at 113.6p, while its shares closed yesterday at 63p, down 11.5p or 15.4% on the day. This would mean the bank issuing more shares and potentially ending up majority owned by the government and subject to European competition rules that would restrict its ability to attract new business.
The Treasury also warned the interest on any preference shares the government bought would be set with regard to the rate at which other banks have issued them. This could mean a rate similar to the 14% Barclays is offering investors instead of the 12% Lloyds TSB, Royal Bank of Scotland and HBOS are set to pay.
Darling also warned that the institution must have a plan to meet the level of capitalisation required by regulators, have a sustainable business model, a clear funding plan, and a credible management team.
An HBOS spokesman said: "We welcome today's very clear statement."
A spokeswoman for Burt and Mathewson said they were "studying the statement" but maintain an independent HBOS would be in the interests of shareholders and customers.
The takeover of HBOS by Lloyds TSB was yesterday backed by the Edinburgh bank's main trade union Accord.
General secretary Ged Nichols said: "All the evidence suggests that, as things currently stand, the only way forward for HBOS is a takeover. Accord members employed by HBOS wish that this was not the case, but there is no merit in avoiding reality."
While the news will have an immediate effect on Burt and Mathewson, who need to convince HBOS shareholders to oppose the deal before their vote on December 12, it will also impact on any other bank that needs funding.
When the initial £37bn government-backed recapitalisation was announced, the Treasury said it would offer another £25bn next year.
Barclays yesterday announced a modification of the terms of its £7bn capital raising, which is being done without government support but has been criticised for diluting existing investors.
Qatar's sovereign wealth fund and Sheikh Mansour Bin Zayed Al Nahyan, a member of the Abu Dhabi royal family, have offered existing institutional investors £500m of the £3bn reserve capital instruments they are buying that pay interest of 14%.
But, crucially, these will not come with the associated warrants that give investors the right to buy more Barclays shares.
New investors from Qatar and Abu Dhabi will ultimately be positioned to own more than 30% of the company. Existing institutional shareholders will also get no share of the 2% commission the new investors are reaping Barclays confirmed its directors would take no bonus for 2008 and would stand for re-election at its annual general meeting in April.
But this appeared to have little impact on investors. The Association of British Insurers, which had an "amber" rating on Barclays's plans yesterday upgraded this to a "red" warning but stopped short of calling for a no vote.
Peter Montagnon, the ABI's director of investment affairs, said: "Shareholders will have to weigh up all relevant factors, including the consequences of rejection for Barclays and the wider banking system."
Barclays shares had a rocky day on the market, falling as much as 10.4% at one point before closing 3%, 4.6p, down at 149.5p.
Royal Bank shareholders will vote on its £19.7bn capital raising tomorrow. Yesterday its shares closed down 3p or 6.7% at 41.7p, a low it hasn't seen since September 1992.
