Investment Banking
R.B.S. Investors Set to O.K. Bad Debts Scheme
December 15, 2009, 5:21 am
Investors in Royal Bank of Scotland Group are set to back its decision to sign up to a state scheme for bad debts but will grill executives on its restrictive terms, including a government veto on pay.
The part-nationalized bank will agree to unprecedented intervention on bonuses as part of the package expected to be approved, which will see the government insure 282 billion pounds of R.B.S.’s bad debts, Reuters reported.
Banker pay has become an increasingly hot political topic in the run-up to an election due next year, but analysts, investors and R.B.S. itself have warned that added restrictions for the bank could hinder its ability to hire and set back its recovery.
On top of a one-off windfall levy on bonuses across the sector announced last week, and an already-agreed restriction on cash bonuses, R.B.S. faces a government veto on the “quantum and shape” of its bonus pool.
That prompted its board members to seek legal advice on whether they should resign if government forced them to take a position that would harm investors and therefore violate their fiduciary duties, Reuters said, citing industry sources.
Prime Minister Gordon Brown and other politicians have said there is no discrimination against R.B.S., but markets have remained uneasy over the threat of a mass board walkout that could harm the bank’s recovery potential.
R.B.S.’s private investors, once stakeholders in one of Scotland’s proudest institutions, now own just 20 percent of the beleaguered bank after it was pulled back from the brink of collapse last year with a partial nationalization.
Under the Asset Protection Scheme the government will offer bad debt protection and its interest will rise to 84 percent from 70 percent.
Edinburgh-based R.B.S., whose troubles put it at the centre of the credit crunch, is the only bank signing up to the APS after domestic rival Lloyds Banking Group turned to the market to raise cash and boost its capital ratios.
R.B.S. is insuring a variety of assets under taxpayer protection, including loans to hedge fund managers, shipping loans, U.K. bank overdrafts and Irish property loans. More than half the loans are overseas.
The bank secured more flexible, “pay-as-you-go” APS terms last month, which would allow it to leave the scheme within four years. In exchange, it will take a higher loss before the insurance kicks in, making it unlikely the bank will dip into the APS fund.
R.B.S. is also being forced to sell chunks of its retail bank (under revived brand Williams & Glyn’s) and its RBS Insurance arm. It will also shrink its investment bank.
The forced disposal plan, which aims to compensate for billions in state aid, was approved by E.U. authorities on Monday.
Go to Article from Reuters via The New York Times »
