Barclays - the bitter pill for Abu Dhabi Thursday, January 22, 2009
Details have emerged that the Abu Dhabi Royal Family inserted an anti-dilution clause alongside their investment in Barclays, which would re-price the shares issued to them in the event that new capital was raised within 9 months at a lower share price. e.g. if £100m bought 100m shares at £1, then if shares were subsequently issued at 50p then they would automatically receive an additional 100m shares [£100m divided by 50p].
Such a clause is relatively common in private placings and Angel/VC rounds of fund raising. It's purpose is simply to protect the investor from subsequent investors being offered better terms, rather than being a device to deter further capital injections. However, the rapid deterioration in Barclays situation and market conditions, with corresponding slump in share price from 153p to under 70p, would prompt a significant repricing of the Abu Dhabi stake were new capital raised at such levels, with the consequence they would probably end up with a majority stake.
This now presents Barclays with a considerable problem - if they conclude that they do need more capital, new investors would face the prospect of automatically being a minority shareholder in the shadow of the Adu Dhabi control. This is likely to deter some sources of new capital and hence frustrate Barclays efforts to the extent that the only source of new funds may be the Abu Dhabi's themselves.
Whilst Abu Dhabi could sit back in the expectation that the UK Government would be obliged to bail out Barclays, I suspect that the UK Government would be forced to nationalise the bank rather than simply inject fresh capital, given that it would be political suicide to be seen to be using taxpayers money to hand control of the bank to another sovereign state.
Nationalisation would clearly be a dramatic step and materially damage relations with Abu Dhabi, given it would wipe out much, if not all, of their investment. However, the idea of nationalising a major UK bank is openly debated and advocated in some serious quarters, albeit RBS and Lloyds are most commonly the subjects of such discussion in this context.
Hence, Abu Dhabi may now find themselves having to consider the prospect of having to [unwillingly] provide more capital to prop up their ailing investment or else waive their anti-dilution rights.