Barclays turns to Middle East in £7bn fundraising

Cash injection from the royal families of Abu Dhabi and Qatar could see them owning nearly a third of the UK's second largest bank

Barclays is raising up to £7.3bn, mainly from Middle East investors who could end up owning nearly a third of the UK's second largest bank. The move announced today allows the bank to strengthen its balance sheet to ride out the financial crisis without getting help from the taxpayer.

Most of the cash injection is coming from the royal families of Abu Dhabi and Qatar, who have both agreed to pump billions into Barclays to bolster its capital ratios. The Qataris, who already own a significant shareholding in Barclays through two different investment funds, are providing up to £2.3bn. Once the deal goes through they will own up to 15.5% of the bank.

Sheikh Mansour Bin Zayed Al Nahyan, a member of the Abu Dhabi royal family, will provide up to £3.5bn and will become Barclays' largest shareholder with a 16.3% stake. A further £1.5bn is being raised from institutional investors.

The deal means that Barclays has avoided selling a stake to the UK government - the partial nationalisation option taken by Royal Bank of Scotland, Lloyds TSB and HBOS.

This means it will avoid restrictions on executive pay, bonuses and shareholder dividends.

The two Middle Eastern royal families appear to be getting generous terms in return for injecting capital into Barclays.

A large chunk of the £5.8bn investment will buy "reserve capital instruments", similar to the preference shares which the UK government is taking in RBS and Lloyds TSB-HBOS. They will pay a dividend of 14% a year, compared with the UK government's 12% a year. The new shareholders will also own warrants allowing them to buy shares in Barclays at 197.775p, any time in the next five years.

Shares in Barclays jumped by 10% this morning in early trading, but had soon fallen by almost 10% to 185.5p as the City digested the deal.

Chairman Marcus Agius brushed aside the suggestion that Barclays was now too reliant on overseas investors. "This is a forward-looking and progressive approach to managing the share register," said Aguis, insisting that these deals create new commercial opportunities around the globe.

"When these strategic investors increase the exposure they have to Barclays they naturally leads to new business," Aguis added. Last year Barclays sold stakes to the goverments of China and Singapore, and in June this year it raised £4.5bn from new and existing shareholders - including Qatar.

Keith Bowman, equity analyst at Hargreaves Lansdown stockbrokers, said Barclays had "proved the doubters wrong again".

"Barclays continues to underline management's strength in outflanking its rivals. RBS has been sunk through its desire to win Dutch Bank ABN from the hands of Barclays, whilst the group's knowledge of the wholesale markets and experience of the property downturn of the early 1990s has left it better positioned than the likes of HBOS," said Bowman.

Satisfying the government

Barclays has been forced to raise more capital as part of the bail-out scheme which seven banks and one building society have signed up to in the government's attempt to shore up confidence in the banking system.

The chief executive, John Varley, said the deal would enables Barclays to meet the capital issuance plan agreed with the UK authorities earlier this month, following the decision by the Financial Services Authority to increase the capital ratio requirements for all UK banks.

"Today's capital raising provides certainty and speed of execution, and combined with the strong third-quarter performance in a volatile operating environment enables us to continue to implement our strategy and build our business by serving clients and customers around the world," said Varley.

When the UK banking bail-out was being agreed with the Treasury earlier this month, Varley had convinced government officials and the Financial Services Authority, that it had one backer prepared to stump up £1bn. Roger Jenkins, a colleague of Barclays executive Bob Diamond, is believed to have led the negotiations to find backers prepared to put more cash into the bank.

The government is due to announce later today that it has approved the takeover of HBOS by Lloyds TSB. Based on today's share prices, Barclays will still be the UK's second largest bank by market capitalisation, worth almost £19bn, behind HSBC which is today worth some £89bn. Lloyds TSB and HBOS are today worth slightly over £17bn.

Contributors

Graeme Wearden and Jill Treanor

The GuardianTramp

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