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Hot Topic – Barclays Bank Rights Issue

Hot Topic – Barclays Bank Rights Issue

Hot TopicAfter reading in the news today that shareholders in Barclays have until 13th September to take part in its rights issue – reportedly the biggest rights issue (£5.8 billion) by a British bank since 2009 – it got me thinking about the shareholders and why the bank is doing it.

The rights issue offers Barclay’s existing shareholders 1 new share for every 4 they hold at a price of 185p – a 40% discount on the 309p the day before it was announced.   So if you own 1,000 shares then you can buy 250 more for 185p at a cost of £462.50.  This is a much higher discount than normally offered on rights issues so why are they doing it?

They obviously need the money; companies strapped for cash often turn to rights issues and Barclays needs the money to comply with the PRA’s demand that banks must hold 3% of total assets as capital against any potential bad debts.

After the new shares are issued, the value of each share is diluted – the theoretical share price following the rights issue is called the ex-rights price and this can be estimated by dividing the total price paid for all the shares by the total number of shares owned but ex-rights prices can be influenced by other things not just the rights issue so it can never be certain what the future value of the increased shareholding will be.

Barclays’ shareholders have 3 options:

  1. They can buy the further shares for the discounted price being offered.
  2. They can sell their rights on the stock market and make a profit.  It’s difficult to work out exactly how much would be made but a rough idea can be calculated by taking the ex-rights price and deducting the rights issue price. This gives the amount of gain per share.
  3. They can do nothing but by doing nothing existing shares will be worth less because Barclays is increasing the number of shares in issue by 25%.  (This isn’t normally the best course of action…)

Whether to buy the new shares is never an easy decision – it depends on personal circumstances of course and appetite for risk.  Barclays share price has been down since the rights issue was announced but you have to imagine that Barclays will surely carry on as a powerful force behind British banking and the offered share price is heavily discounted.

Your comments and thoughts would be appreciated!