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 The rights issue the bank undertook in May 2008 raised £12bn and
shareholders believe it was promoted on a misleading basis. Hence it is
likely to be the focus of any legal action on behalf of shareholders. The
following analysis is a cursory overview of some of the issues and is not
meant to be either an exhaustive analysis of the prospectus or of the basis
for any legal case that may be pursued.
The letter from the Chairman of RBS at the time, Sir Tom McKillop, and dated
25th April 2008 includes the following comments about the prospective rights
issue:
"Overall underlying performance of the Group remained satisfactory with the
principal exception of a slowdown in capital markets activity in Global
Banking & Markets"; and
"Following the rights issue, RBS believes that it will be in a strong
position to realise the substantial value in its UK and international
franchises and to take advantage of the growth opportunities available to
it".
Would not anyone reading that consider these comments to be both positive
and optimistic about the future prospects for the company? Although it
refers to write-downs in respect of credit market exposures of £4.3bn (net
of tax), it also indicates that after taking into account planned disposals,
the capital ratios would increase substantially suggesting that the balance
sheet strength would be significantly improved.
Capital Write-Downs
The
write-downs for credit market exposures of £4.3bn (£5.9bn gross) are
explained in more detail on page 26 of the prospectus and include estimates
of the likely write-downs for the whole of 2008. On that page it says
"These estimates are based on what the Board considers to be prudent
assumptions reflecting the further sharp deterioration in market conditions
and outlook in credit markets at this point". In reality the actual
figure from the 2008 Annual Report turned out to be £7.8bn for credit market
exposures plus credit impairment losses of £7.0bn - in addition there was an
impairment charge of £16.2bn of which 47% related to ABN-AMRO and its
assets. Clearly the Board's forecasts of the outcome for the year, when they
were already 4 months into the year, were wildly wrong.
ABN-AMRO
It
was made clear at the 2009 AGM that the ABN-AMRO acquisition was a big
mistake and a lot of the write downs were related to the toxic assets
acquired as part of that deal. However in April 2008 the Chairman simply
reported that ABN-AMRO integration synergies were on plan, with no hint of
the problems that were subsequently to become apparent. Page 29 of the
prospectus covers this in more detail, and there is no mention of any problems.
Dividends
Page 27 of the prospectus covers the likely future dividend policy, which is
usually an important factor for shareholders when evaluating a new
investment in the shares of a company. It suggests there will be a similar
payout ratio going forward, although it warns that the additional capital
raised may not generate the same returns as existing capital so that some
reduction is likely. But in general it suggests that the dividend is
sustainable when in reality it has turned out to be otherwise.
Current Trading and Prospects
Current trading and prospects are covered on page 29 of the prospectus and
there is no hint of any major problems looming. For example it states
"overall credit risk metrics have remained stable in the first quarter, with
a continued decline in UK personal sector impairment losses but increased
delinquencies in a specific US retail portfolio. Corporate credit quality
remains broadly stable".
Working Capital
Page 22 of the
prospectus states "The Company is of the opinion that, after taking into
account existing available bank and other facilities and the net proceeds of
the Rights Issue, the Group has sufficient working capital for its present
requirements, that is, for at least the next 12 months from the date of this
document", i.e. from April 2008. How wrong can you be? By December 2008
Alistair Darling even said on BBC TV's Panorama programme that RBS "needed
an awful lot of money" after the forced "recapitalisation" of RBS and other
banks.
The full prospectus issued in April 2008 is
available from this page of the RBS web site:
www.investors.rbs.com/shareholder_services/rights.cfm - you need to
select your country location and then go to the Documentation tab on the
following page for the actual prospectus document (note: if the
link does not work then please let us know as RBS seem to move the item
sometimes).
In
summary, although there are of course a number of "risk warnings" as in any
prospectus, and the directors might attempt to claim that the general
situation in financial markets changed after the collapse of Lehman's, in
essence it was probably not a prudent document as a whole, and shareholders,
particularly those who were not familiar with the risks associated with some
of the assets in RBS, or the known problems in financial markets, may well
have interpreted the prospectus in a more positive fashion than was
warranted.
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