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Friday, January 23, 2009

Barclays: Death Spiral Fun

This is called Death Spiral Finance… and it always ends in tears. Stupid Barclays (BCS) got themselves into a death spiral situation.

For nimble traders of the intraday variety, BCS can be great fun, but don’t hold overnight… long or short. Gaps of 20% in either direction will be the norm.

Barclays May Have to Give More Control to Gulf Group (Update2): “Barclays Plc may have to give up more control to Middle East investors if the U.K. bank is forced to seek additional capital.

Abu Dhabi’s royal family and two Qatari investors purchased a 32 percent stake in October after London-based Barclays decided against accepting funds from the British government. Barclays fell 10 percent today in London to the lowest in two decades after the bank said its agreements stipulate it must offer additional shares at a discount to the Middle East group before accepting any money from the U.K.

The provisions, intended to prevent the dilution of the 32 percent stake, wouldn’t stop the company from taking up assistance from the U.K. government, Barclays spokesman Alistair Smith said by telephone today. Other investors who bought Barclays convertible notes have similar protection, he said.

The anti-dilution clauses “have no bearing on Barclays’s ability to participate in the package of measures announced by the tripartite authorities,” Smith said.

Barclays raised 5.3 billion pounds ($7.4 billion) on Oct. 31, selling securities including convertible notes to Sheikh Mansour Bin Zayed Al Nahyan of Abu Dhabi, Challenger Universal Ltd. and Qatar Holding. Barclays has plummeted since then in London trading on speculation it will need more capital to cover credit writedowns and may be taken over by the British government.

“This means that it’s going to be tricky for them to raise capital in the next five months,” said Bruno Paulson, an analyst at Sanford C. Bernstein in London who has an “outperform” rating on the stock. “The clause didn’t really matter when the stock price was healthy. It only kicked in severely this week.”

The stock is down 61 percent this month and 67 percent since Barclays announced plans to sell the convertible notes. They pay interest of 9.75 percent until they are converted to stock at 153.3 pence apiece on June 30.

Qatar Holding and Sheikh Mansour also bought 3 billion pounds of securities known as reserve capital instruments. These require Barclays to pay annual interest of 14 percent and give the investors warrants to buy more than 1.5 billion Barclays shares at about 198 pence apiece. Barclays fell to 59.2 pence in London today, valuing it at 5 billion pounds, less than it raised from the Gulf funds last year.

The contracts with the investors would prevent the U.K. government from taking a majority stake in the bank, the Times and Telegraph in London reported earlier today.”

Barclays Prefers to Pay Cash for U.K. Guarantee, Varley Says: “Barclays Plc would prefer to pay for the government’s toxic asset guarantee plan in cash rather than equity, Chief Executive Officer John Varley said in a video broadcast on the Web site of Cantos Communications Ltd.

“Our predisposition would be to pay in cash,” Varley said. “The government was very clear it’s not looking for ordinary equity as a means of satisfying that payment.”

The U.K. government announced plans, Jan. 19, to guarantee toxic assets for a fee and gave the Bank of England power to buy 50 billion pounds ($69 billion) of securities in the second effort in three months to underpin confidence in the banking system. Barclays has declined 55 percent in the past week on speculation it may take more writedowns and could be nationalized.

“There is no truth” in speculation the government is unhappy with how Barclays has valued some of its assets, Varley said. “We have a real-time obligation to ensure that the numbers that we publish are reliable and our numbers are reliable. We take that obligation with deadly seriousness.””


Anonymous said...

Hi Ben, Any Hindenbergs in all this?

Ben Bittrolff said...

No more Hindenbergs. The markets needs to be in an uptrend. It is one of the conditions. The Hindenberg Omen is a crash signal. We got the omens... and we've crashed.

DiverCity said...

If Barclays is nationalized, what effect, if any, could we expect that to have on GLD?

DiverCity said...

I meant IAU. Sorry.

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