Barclays Still The Best Prospect
Vidya Ram , 03.10.09, 09:40 AM EDT
Concerns about the toxic asset deal may be overstated.
The question of whether Barclays would sign up for the British Treasury's asset protection program, and on what terms, continued to loom on Tuesday as its shares bounced back from heavy losses the day before.
The market seemed relieved after the bank held a dinner for analysts on Monday evening. "They are reiterating the message that though they have started to look at the program, discussions will be more involved in the next few weeks, and they have submitted a sample portfolio of assets," said Leigh Godwin of Fox-Pitt Kelton in London. "They believe that their balance sheet is better than others such as the Royal Bank of Scotland, evidenced by the way the FSA treated them last year during the recapitalization," he told Forbes, referring to the stress testing carried out by the British financial market regulator.
The fall of Barclays shares on Monday was triggered by concerns over its involvement with the government's asset protection program, which limits the losses on toxic assets borne by participating banks.
So far two banks, Royal Bank of Scotland (nyse: RBS - news - people ) and Lloyds Banking Group (nyse: LYG - news - people ), have signed up for the plan, striking a deal that diluted the stakes of existing shareholders. On Monday, Lloyds struck a deal to insure 260.0 billion pounds ($360.1 billion) worth of toxic assets, issuing 15.9 billion pound ($22.0 billion) of non-voting shares to the government, and also raising the government's stake to 63.0%, from 43.0%, through the conversion of some non-voting shares to ordinary shares. Analysts at Nomura estimated that the arrangement reduced the tangible book value per share of the bank by over 50.0%. (See "British Treasury Lends Lloyds A Helping Hand.")
Raising extra capital is something that Barclays will want to avoid at all costs, and to keep itself out of majority control of Middle Eastern investors it tapped for capital last year. Last month, it emerged that under the terms of the deal, Qatar and Abu Dabi would have the right to subscribe to shares at a lower price -- if, at any time before June 30, the bank raised more capital at a lower price. This could effectively cede control of the bank to those investors, which it turned to in the first place to avoid turning to the government. (See "Barclays Promise Fails To Erase Doubts.")
Barclays will want instead to pay in cash, which raises the question of whether it can afford to do so, and whether the market regulator will let it get away with putting a smaller pool of assets into the program than its competitors.
Shares of Barclays were up 13.2%, or 8.10 pence (11 cents), at 69.50 pence (96 cents), in London. Late on Monday, Barclays Capital agreed to buy New York Stock Exchange market maker Bear Wagner Specialists from JP Morgan Chase for an undisclosed sum.
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