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Barclays to Raise 5.8 Billion Pounds in Rights Offering

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Barclays Plc, the U.K.’s second-largest bank by assets, said it will raise 5.8 billion pounds ($8.9 billion) in a rights offering to bolster capital as it booked its biggest charge to date for customer compensation.

The lender will offer investors one new share for every four shares they already own for 185 pence, 40 percent less than yesterday’s closing price, London-based Barclays said in a statement today. It will also shrink assets by as much as 80 billion pounds to 1.5 trillion pounds and sell about 2 billion pounds of loss-absorbing securities to meet calls by the British regulator to reduce leverage.

Chief Executive Officer Antony Jenkins is selling more shares than the 4 billion pounds analysts had anticipated after the lender’s capital shortfall swelled to 12.8 billion pounds at the end of June under the stricter Basel III rules on bank capital. The Prudential Regulation Authority is imposing a 3 percent leverage ratio, forcing banks to hold 3 pounds of equity for every 100 pounds of assets to make the financial system safer. Barclays had sought to plug the deficit by using contingent convertible bonds and retaining earnings.

“If you’re doing a rights issue then you have to clear the decks and present investors with a clear balance sheet,” said Mike Trippitt, a London-based analyst at Numis Securities Ltd. who downgraded Barclays to sell this month in anticipation of a rights offering. “You can’t do a rights issue and then follow it up with additional provisioning in the next quarter. My only concern is that they haven’t done enough.”

Provisions

The lender will set aside 2 billion pounds to cover the cost of redress. It will allocate 1.35 billion pounds for clients sold insurance on loan repayments they didn’t need and a further 650 million pounds for customers offered interest-rate swaps that lost them money, Barclays said. That brings the amount Barclays has set aside to cover compensation to 5.4 billion pounds, second only to Lloyds Banking Group Plc (LLOY)’s 7.2 billion pounds.

The shares tumbled 5.3 percent to 292.75 pence as of 8:29 a.m. in London trading. The stock has jumped 12 percent this year, making it the third-best performer among Britain’s five largest banks after Lloyds and HSBC Holdings Plc.

Pretax profit excluding gains and losses on the bank’s own debt and compensation charges fell to 3.59 billion pounds from 4.34 billion pounds in the year-earlier period, missing the 3.7 billion-pound estimate of 22 analysts surveyed by the company.

Restructuring Charges

That decline included 640 million pounds of restructuring costs linked to Jenkins’s overhaul of the lender to make it more profitable. He is seeking to cut 1.7 billion pounds in annual expenses by 2015, eliminate 3,700 jobs and reduce costs to about 55 percent of income from 71 percent in the first quarter.

Profit at Barclays’s investment-banking division rose to 2.39 billion pounds from 2.24 billion pounds, missing analysts’ estimate of 2.48 billion pounds. Revenue from fixed income, commodities and currencies fell 13 percent to 3.57 billion pounds.

Barclays was one of only two British lenders to miss the regulator’s leverage target in June, with only 2.5 percent. Nationwide Building Society, which at 2 percent also failed, was given until the end of 2015 to make up the shortfall.

Barclays said that under the full Basel III rules its ratio was only 2.2 percent at the end of June, creating a capital gap of 12.8 billion pounds.

“After careful consideration of the options, the board and I have determined that Barclays should respond quickly and decisively,” Jenkins said.

Comfort Waning?

In February, Jenkins presented his plans as leader of the bank to investors, pledging to cut costs, close businesses that hurt the bank’s reputation or weren’t profitable, mend relations with regulators and pay more of its profits to shareholders. He said at the time he was “comfortable” with how regulators viewed the bank’s capital plans.

That comfort has waned, said Chirantan Barua, an analyst at Bernstein Research with an outperform rating on Barclays.

“What has been quite bizarre is the turnaround from February when we were led to believe that the strategy and targets were vetted by the regulator,” said Barua, who’s based in London. “Especially around stuff like PPI and swaps mis-selling which are legacy problems.”

The lender will sell new stock, 2 billion pounds of Tier 1 securities, reduce leverage exposure by 65 billion pounds to 80 billion pounds to about 1.5 trillion pounds and retain earnings to meet the target. The plan will boost the lender’s core Tier 1 capital ratio to 10.5 percent under the Basel III rules by 2015.

Sale Underwriters

Credit Suisse Group AG, Deutsche Bank AG, Bank of America Corp. and Citigroup Inc. are underwriting the stock sale, the biggest since Lloyds’s 13.5 billion-pound offer in 2009. The offer is slated to start in September, according to a statement sent by Bank of America.

“We have considered all elements of the plan, including new capital issuance, planned dividends and management actions to be taken and, based on Barclays’s projections, conclude that it is a credible plan to meet a leverage ratio of 3 percent, after adjustments, by June 2014 without cutting back on lending to the real economy,” the PRA said in a statement today.

Jenkins also pushed back his target to make the lender’s return on equity, a profitability measure, exceed its cost of equity, to 2016, rather than 2015.

(Source: Bloomberg)