Barclays under fire for allowing Middle East states to take more than 30% stake

• Cable asks if move was prompted by bonus fears
• Shares slump 12% over worries about implications

Barclays yesterday faced criticism for allowing Middle Eastern states to take a more than 30% stake in the bank as it sought to avoid taking cash from the British taxpayer to boost its balance sheet.

The intricately structured financing - under which the Abu Dhabi owner of Manchester City football club will become the single biggest investor - also required Barclays to raise £1.5bn in a share placing on the open market. After the stock market closed last night, Barclays admitted that it had found buyers for only £1.25bn.

In total the bank still managed to raise just over £7bn, more than the £6.5bn it had promised the UK government it would find as part of its historic bank bail-out programme announced last month. In raising the funds, the bank stunned critics who had been convinced it would fail to meet the government's deadline -which extended until next spring.

However, after initially rising 9%, Barclays shares slumped 12% to close at 178.9p as the City digested the terms being paid by the bank to attract the financing and the weight of the new share placing on the stock market.

John Varley, the Barclays chief executive, defended the terms being offered to encourage the royal families of Abu Dhabi and Qatar to take a combined share holding of more than 30%.

Analysts at brokers Keefe Bruyette & Woods said: "Barclays has avoided having the UK government on its shareholder register, but it has come at a cost to existing common shareholders ... The unquantifiable element is whether this will ultimately prove to be a price worth paying given the current uncertainties in the terms and conditions that come with the route to raising capital being chosen by RBS, Lloyds TSB and HBOS."

Spurning the UK government bail-out means Barclays can avoid a ban on executives' bonuses, paying dividends and a demand to increase lending to small business and would-be home owners.

This prompted questions about whether Varley and his management team including Barclays president Bob Diamond had been keen to avoid the bail-out so they could keep paying bonuses. James Eden, banks analyst at Exane BNP Paribas, posed the question to the Barclays management while Liberal Democrat treasury spokesman Vince Cable also raised the issue.

Marcus Agius, Barclays chairman, rejected the suggestion. He insisted the ability to keep paying bonuses "had nothing to do with this at all". "It's to do with self-determination."

Shareholders must approve the share sale to Sheikh Mansour bin Zayed Al Nahyan -a member of the Abu Dhabi royal family who will provide £3.5bn and become Barclays' largest shareholder with a 16.3% stake - and the Qataris, who are providing up to £2.3bn, at a shareholder meeting on November 24.

Barclays is paying annual interest of 14% on the financing instruments it is issuing until 2019. The government is charging a 12% coupon for five years for its support. Barclays argued that its payments were tax deductable, reducing the cost.

The bank also brought forward a trading statement in which it insists profits for the first nine months of the year were "slightly ahead" of 2007. This was despite credit crunch writedowns rising by £1.2bn to £4bn in its Barclays Capital division.

The deal

The deal hinges on two instruments:

£4.3bn of mandatorily convertible notes which carry a 9.75% quarterly interest rate and convert into Barclays shares at a price of 153.276p

and £3bn of reserve capital instruments, similar to preference shares, carrying an interest rate of 14%.

Qatar Holdings is taking £0.5m of MCNs and £1.5bn of RCIs. Investment vehicle Challenger is taking £0.3bn.

Sheikh Mansour is taking £2bn of MCNs and £1.5bn of RCIs.

There are also £3bn of warrants that become available at a later date


Jill Treanor

The GuardianTramp

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