The price of freedom

31 October 2008 By Jeffrey Goldfarb Follow @jgfarb

The UK bank has managed to raise capital on its own. But to turn the £7bn trick, Barclays will pay a 14% rate until 2019 for half of it, hand over inthemoney warrants and issue converts at a big discount. Shareholders might wonder if turning down the state s offer was wise.

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Barclays announced a plan to raise £7bn from Qatar Holding, an arm of the Qatar Investment Authority; Challenger, an investment vehicle owned by the Qatari Shiekh Hamad Bin Jassim Bin Jabr AlThani; and Sheikh Mansour Bin Zayed Al Nahyan of Abu Dhabi. They would own a combined 32% of Barclays if the entire package were enacted.

The capital raising includes £3bn of reserve capital instruments, which pay an annual coupon of 14% until June 2019; warrants to subscribe to 1.5bn new ordinary shares at 197.775p each, exercisable at any time for five years; and £2.8bn of mandatory convertible notes which will pay an annual coupon of 9.75%. The conversion price on the converts is 153.276p.

Barclays will pay £300m of commissions, fees and expenses, including a 4% commission on the mandatory converts; 2% for the reserve capital; and £66m to Qatar Holding for helping arrange some of the capital raising.

A shareholder vote on the package is scheduled for November 24. The capital raising will lift Barclays Tier 1 ratio to 11.3% and its equity Tier 1 ratio to 7.6% on a pro forma basis as at June 30.

Barclays said it intends to resume paying a dividend in the second half of 2009. It added in a separate interim management statement that group profit before tax for the nine months ended September 30 was slightly ahead of 2007. Net losses from credit market writedowns in the third quarter were £129m. This included £1.2bn of writedowns offset by £1.1bn of gains on the fair valuation of its own debt.

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A shareholder vote on the package is scheduled for November 24. The capital raising will lift Barclays Tier 1 ratio to 11.3% and its equity Tier 1 ratio to 7.6% on a pro forma basis as at June 30.

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