Barclays small print could hand control to Middle East investors

Published on Thursday 22 January 2009 20:40

CITY experts and politicians hit out at banking giant Barclays' "lack of judgment" yesterday following the disclosure that Middle East investors could gain majority control of the bank.

It has emerged that under a little-known clause in last October's fundraising deal with Qatar and Abu Dhabi, the investors could see their stake in the bank rise at no extra cost if the bank raised new funds at the current depressed share price.

Shares in Barclays slumped a further 10 per cent to 59.2p yesterday, compounding falls earlier in the week.

Alex Potter, banking analyst at broker Collins Stewart, said: "This could be very bad news for the Barclays share price.

"It also exhibits questionable judgment by Barclays's management that they agreed to such a condition. It precluded that markets could get materially worse and that they might need to recapitalise at a lower share price level. That could hand control of the bank away without other shareholders having their rights upheld."

Some of the City criticism centred on the "small print" nature of the clause in the 7 billion fund-raising that gave the Abu Dhabi and Qatari consortium 32 per cent of Barclays.

One fund manager said: "I don't believe sufficient prominence was given to this condition of the fund-raising.

"It was clearly material for other shareholders, and so was a lack of judgment on Barclays' part in being in the small print."

It was a point echoed by the Scottish National Party. The party's Treasury spokesman at Westminster, Stewart Hosie, said the SNP did not believe it was necessarily bad if ownership of Barclays moved overseas "as long as it continues to operate professionally and lend effectively".

But Hosie added: "However, if this is of real concern to Barclays' management or the City then it begs the question why the clause in the original funding contract (with the Middle East investors] went so unnoticed."

Abu Dhabi and Qatar's deal with the British bank in October stipulated that if Barclays raised more capital before June they would receive a greater number of shares for their original investment.

It is understood the clause was inserted at the request of Amanda Staveley, chief executive of PCP Capital, the private equity firm that advised the Middle East investors on taking the stake. Sources say such clauses are standard in fund-raisings to protect new investors being diluted if companies subsequently raise funds at a lower level.

The complex Middle East deal related to up to 4.3bn of mandatorily convertible notes issued, which are due to convert at 153.276p. The conversion price will be lowered if Barclays issues new shares, distributes an extraordinary dividend "or certain dilutive events occur".

According to some calculations, if new funds were raised near current prices Barclays would have to triple the number of shares issued to the Middle East investors, effectively giving them 55 per cent – majority ownership – of the bank.

Barclays said yesterday that the suggestion of foreign control was "based on the premise that Barclays will need to raise capital before 30 June".

It added: "We said in our statement of 16 January that our pro forma tier 1 capital ratio is approximately 9.5 per cent, well ahead of the level required by the Financial Services Authority."

Barclays said the anti-dilution clause in the Mandatory Convertible Notes agreement had been present in other fund raisings of this type and was fully disclosed. The bank added: "This clause has no bearing on Barclays' ability to participate in the package of measures announced by the Tri-partite Authorities on Monday."