Royal Bank of Scotland's tentative plan for a cash call to trim the government's stake, potentially ahead of a move by rival Lloyds, was met with lukewarm enthusiasm on Monday, sending its shares sharply lower.
A source familiar with the matter said on Sunday RBS chief executive Stephen Hester was gauging investor appetite for a share issue of up to 4 billion pounds ($6.5 billion), as the bank seeks to limit the increase in state ownership after a government-backed insurance scheme for bad debts is agreed.
RBS, which left investors nursing losses after a record 12 billion pound rights issue last year, declined to comment.
Shareholders and analysts said they were surprised by the mooted move, which will do little to substantially alter the state's holding, currently standing at 70 percent.
But they said any step to take advantage of current market conditions would have to be swift — if RBS is to act before any decision is made by Lloyds, which has said it is considering its own options around the insurance scheme, and before its own closed period begins next month, ahead of November earnings.
"They certainly seem keen to do it. The rationale is that at some point an awful lot of these issues will come to the market and they are keen to make a start as early as possible," one top-25 RBS investor told Reuters.
"The tricky thing is that they are saying it's only a few billion pounds — but that's quite a lot and it doesn't change the cosmetics of things very much at all. It's a bit of an aggravation to be perfectly honest."
The investor said: "It doesn't feel like the kind of thing to me that people are going to be thrilled about."
RBS shares accelerated their losses through the day after the news, and were down 6.8 percent at 52.5 pence at 1440 GMT.
Analysts said the bank could look to an accelerated book build, which would be swifter and easier than a traditional share issue and could allow it to sidestep a full prospectus, if it raises no more than 10 percent of issued share capital, or just over 3 billion pounds.
LIMITING WESTMINSTER'S HAND
The British government has so far injected 20 billion pounds of capital into RBS, taking a stake of around 70 percent.
That could rise, however, if the bank goes ahead with plans announced in February to participate in the government-backed Asset Protection Scheme (APS) to protect 325 billion pounds of assets. As part of that plan it will take a further 19.5 billion pounds government cash injection — which includes a 6.5 billion pound fee — in exchange for "B", non-voting shares.
Converting those extra shares would raise the government's stake in RBS to over 80 percent.
RBS's mooted cash call — which is dwarfed by its own and HSBC's record share issues but is still sizeable at 4 billion pounds — could limit that stake increase to just over 70 percent. But analysts questioned the use of the move.
"Is 70 that different from 84? It is not going to keep the EU away, it not going to stop government control — it does not seem like it will make a great deal of difference," analyst Simon Maughan at MG Global said. But Maughan said the bank could be responding to some investors eager to see demands on their purses staggered.
"So far, there hasn't been any particular constraint on banks raising money on the market and a lot of issues have been oversubscribed or are clearly demanded. There is no evidence we have reached saturation point yet," he said. The sale of a 9 percent government stake in Swiss bank UBS earlier this year was well oversubscribed.
"But there may be an acceptance among institutions that they will have to put money up, and ultimately it may be first come, first serve."
Lloyds last week confirmed after weeks of speculation that it may scale back or cancel its participation in the APS as a healthier economy improves the outlook for bad debts.
But RBS is not understood to be considering a full-scale exit. JP Morgan estimated in a note on Monday that RBS would need to raise up to 28.5 billion pounds to sidestep the APS.
Ultimately, shareholders said, it would come down to the final terms of any capital increase.
"If the sums add up, in terms of it being less punitive and less dilutive and somewhat more earnings enhancing (than the current option),… then fine, we will look at it as much as we would for Lloyds," one top-15 investor told Reuters.
