Sample Essay On Barclays Right Issue
Rationale for right issue
The declaration of Right Issue by Barclays Bank was part of the announcement by Prudential Regulation Authority (PRA) on June 20th, 2013, where after scrutiny of capital adequacy of major banks in the nation, it announced that all the banks should have Leverage Ratio of 3%, calculated on a PRA-adjusted CET1 capital base and using a CRD IV leverage exposure measure. However, on that date, Barclays' PRA Leverage Ratio was 2.2%, representing a deficit of £12.8 billion in volume.
Thus, in order to achieve the target PRA Leverage Ratio of 3% by stipulated deadline of June, 2014, Barclays took the necessary action by announcing the Right Issue for the shareholders where it planned to raise £5.8 Billon through the action. The chairman, David Walker also stated that the amount raised through Right Issue will further solidify the capital position of the Bank; thus allowing to increase the dividend payout ratio.
Financial Performance before announcement of right issue
Referring to the table below, we can witness that during 2012, the EBIT margin of the company has decreased from 13.94% to 0.29% while the return on capital employed has plunged down from 8.52% to 0.15% only. Thus, the trend in these ratios indicate that the bank was experiencing significant decline in the profit margins and was also not able to earn appreciable returns on the capital employed.
Also to be noted, the gearing ratio of the company declined marginally from 53.09% to 51.72%, however, the current level of ratio multiple is still very risky for the company considering its decreased profitability.
Thus, on summarization of all the factors, we can conclude that Barclays in addition to the mandate issued by PRA was also trying to improve its profitability through investment of more funds to be obtained from right issue and not with debt financing because of its existing leverage situation.
-Terms of Rights Issue
The right issue was announced under the terms of one for four shares held at the price of £1.85 per share with the intention to raise £5.8 billion, net of expenses. In other words, any shareholder holding four shares at the time of announcement of right issue will be entitled to purchase one right issue that can be converted to ordinary share at the price of £1.85 per share, 40.1% less than the closing price (£3.09) of the stock on London Stock Exchange at the time of announcement of issue.
The issue was underwritten by banks like Credit Suisse, Deutsche Bank, Bank of America Merrill Lynch and Citi,
-Market Value of Right
Since at the time of announcement of right issue, shares of Barclays PLC was trading at £3.09 per share on London Stock Exchange and the issue was announced at £1.85 per share; the market value of right issue was:
= Closing Stock Price- Right Issue Price
= £1.24 per share
-Anticipated Ex-Rights Price
At the time of announcement of issue, the anticipated ex-right price was estimated to be £2.67 per share while the announced price was £2.47 per share.
-Buy or Sell Right Issue?
Assuming that the shareholder holds 10600 common shares of Barclays PLC and under the right issue, he earns, 10600/4= 2650 right shares.
-Case A: If shareholder purchases the shares under the right issue
Now, the shareholder has the option to purchase these 2650 right shares at £1.85 per share that will cost him total amount of £4902.5. However, had he not been given the right issue option, purchasing 2650 shares would have cost him, 2650*3.09= £8188.5.
Hence, purchasing the shares under right issue earned him profit of £8188.5-4902.5= £3286
-Case B: If shareholder sells the rights issue
Now, if the shareholder sell the right shares at the market value of £1.24 per share, he will earn, 2650*1.24= £3286, which is his clean profit without investing anything.
Thus, this proves that an investor will in principle be equally well off from investing in the issue or selling the rights they have been allocated.
There was a quick market reaction to the announcement of right issue by the company as the share price fell by 6% to £2.92 per share as against £3.09 for the previous day closing on 29th July, 2013. The reaction by the market to the right issue can be viewed from the price pressure theory and informational hypothesis.
As per the theory of price pressure, the market expected the bank to announce right issue; however, the size of the issue, i.e. 3,216,893,546 shares was significantly higher than what was anticipated by the market participants. Thus, we can interpret that it was the large issue of shares by the company which was followed by declining demand by the investors that lead to the fall in the price of the stock.
On the contrary, believing the argument against price pressure theory that holds that there needs not be a fall in the value of the share price following the announcement of a rights issue as long as the investment value of the share can be maintained. In other words, the right issue by Barclays was a cushion to its dividend payout capacity; hence, there was no reason that it was the large size of the issue that leads to fall in the price of the shares. However, for the theory to turn valid, the markets should be perfectly efficient where investors would be aware of the investment value of the share and as long as this is unaffected and no adverse information about the company is released at the time of issue the share price will not fall. Thus, according to this theory, the share price decreased because of 17% fall in the pre-tax profits of the company and not because of large share volume offered by Barclays PLC.
In conclusion, it can be said that it was the informational hypothesis relating to fall in the profits of the company that lead to the market reaction which lead to fall in the stock price.
3 Simple Reasons to Buy Barclays. n.d. 16 February 2015 <http://www.iii.co.uk/articles/122746/3-simple-reasons-buy-barclays-plc-today>.
Barclays PLC Announces Leverage Plan. n.d. 15 February 2015 <http://www.investegate.co.uk/barclays-plc--barc-/rns/barclays-plc-announces-leverage-plan/201307300700504184K/>.
Hunter, Richard. Barclays Rights Issue - what can investors do? 17 September 2013. 15 February 2015 <http://www.hl.co.uk/news/articles/barclays-rights-issue-what-can-investors-do>.
The Price Pressure Hypothesis Revisited: Evidence from Tax-Induced Selling. n.d. 15 February 2015 <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2083608>.
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