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Tuesday, April 03, 2012

RBS to pay £400m dividend to preference share holders

RBS is working on plans to “turn the tap back on” for a £350m-£400m dividend payment to preference shareholders as the bank addresses a clutch of hurdles in its quest to privatise the Government’s 82pc stake.


“Paying a dividend is good market behaviour and is an important signal to debt holders and equity holders,” said a source, who added that no final decision had yet been made.

RBS needs to get approval from both the Government and the Financial Services Authority to make the pay-out. It will begin negotiations this week.

However, in the wake of the financial crisis, the City watchdog has pushed banks to raise capital levels and ensure they take steps to preserve their financial strength rather than distributing funds through dividends and bonuses.

Last month, Lloyds Banking Group, which is also taxpayer backed, raised £170m in the public market in order to pay its preference share dividend - which is held by debt holders.

The move was “capital neutral”, meaning it did not have any impact on the bank’s core Tier 1 ratio – its “buffer” of capital.

Under EU state aid rules, RBS has been prevented from paying any dividends for the last two years. But the ban is lifted at the end of April.If RBS does not re-instate the dividend it will not be allowed to move forward with normal dividends to regular shareholders.

It also won’t be allowed to buy out the Government’s dividend access share, whichgives the Government priority on dividends.

Talks between chief executive Stephen Hester and institutionalinvestors have centred on a stake of up to £16bn in the bank beingsold for as little as 32p a share.

The talks with institutional investors and hedge funds are part of a build-up in momentum in the privatisation strategy that will see the Treasury sell down multiple stakes over several years – and atdifferent prices.

“Institutions which have a long-term relationship with the bank don’twant to be shut out of any deal to sell down a stake,” said one insider. “They want to be shown an offer, which could mean being part of a group of cornerstone investors alongside a foreign investor.”

The second hurdle RBS faces in getting the bank ready for privatisation is ending its inclusion in the asset protection scheme.

This insurance policy has been a lucrative income for the Treasury and was entered into at the bank’s nadir to protect it from toxic assets on its balance sheet. The Treasury has charged RBS £2.5bn for the scheme, which is due to end in September this year.

“It has served its purpose and is no-longer valuable. The bank wants to exit at the first opportunity,” said a source.

Again, the FSA would need to sanction the move, which would be tantamount to giving RBS a clean bill of health.

The other onerous financial charge RBS pays for is a contingent capital facility that gives the bank the option to draw down £8bn of capital in case its core tier 1 capital falls below 5pc. It is due to last until December 2014 and will cost a total of £1.6bn.

However, European regulation now demands much higher Core Tier 1 capital – so the use of the scheme is limited.

Insiders say the bank will begin talks over the summer with Government to see if they can exit as early as next year.

Finally, RBS needs to address the dividend access share (DAS), which was created at the time of the APS and gives taxpayers rights to an enhanced dividend.

The DAS is a major barrier to attracting investment into the bank and talks with Middle Eastern buyers and fund managers are dependent on RBS getting rid it.

However, it only expires when the share price exceeds 65p for 20 days in any 30 day period and has a theoretical value of up to £2.3bn.

RBS now wants to pay less than £1bn. Because the DAS is a private market agreement sources say they are confident the Government is likely to agree to a lower payment to help the privatisation process.

RBS could announce a deal as early as this year but would need to wait until next year to hand over the cash to the Government. “The bank is working on a lot to get it ready for privatisation. Talks with buyers are part of a normalisation process,” said another source.

The political impetus is also matched by the Treasury’s belief that it is possible to offload around £17bn in shares at a low price without losing money because they bought into the £45bn bailout at between 31.75p-65.75p-a-share.

“The first deal will be the most important because it will send a strong signal that the Government won’t interfere in the bank any longer. It will help boost the share price, which will help it sell of bigger stakes going down the track.”

telegraph.co.uk

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