Barclays bows to investor fury over capital raising

The top four executives at Barclays agreed to waive their bonuses for 2008 yesterday after the latest tweak to the terms of the bank's much-maligned refinancing plan failed to stem investor criticism of the package.

The bank's chief executive John Varley bowed to pressure yesterday when Barclays agreed to open up to existing shareholders some of the preferential terms initially granted only to Middle East investors for its £7.3bn fundraising. In another attempt to appease investors, the company announced that the board will stand for re-election in April.

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But the Association of British Insurers (ABI), which represents a large swath of Barclays investors and last week had already expressed doubt about the plan after meeting Barclays executives, yesterday increased its objections. It raised its rating of the project from its provisional certification of amber to the stronger red, meaning it sees issues "of grave concern" for shareholders.

"These changes cannot offset the concern of shareholders at the serious breach of the pre-emption principle, especially on an issue with a large discount," Peter Montagnon, the ABI's director of investment affairs, said. "Other concerns include the preferential terms available to some investors, and the overall cost of the issue to existing shareholders. After careful consideration we therefore felt we had no choice but to proceed with a red top."

The ABI refrained from recommending Barclays shareholders to vote against the proposal, although Mr Montagnon explained that the ABI never gives direct voting advice.

A rival organisation, Pirc, which advises shareholders on voting, went further and recommended they vote against the proposals at the EGM convened for Monday.

Barclays will argue in a letter to shareholders that offering pre-emption rights and equal terms to all would have been time-consuming in practice and undermined Barclays by making the capital-raising less certain.

The bank has sought to avoid the Government's bailout plan accepted by its rivals Royal Bank of Scotland, Lloyds and HBOS, which limits dividends and executive pay, by raising money from the sovereign wealth funds. Barclays executives said at the time that they think the bank should gain a competitive advantage "in the current market landscape" by not having the Government limiting its nimbleness.

The resulting transaction will leave Middle-Eastern investors with a substantial chunk of Barclays. But under the plan, the bank is paying 14 per cent interest for 10 years on so-called Reserve Capital Instruments (RCI), being used to raise about £3bn. That is the highest rate yet being charged for bank capital, and all the more when compared to the 11-12 per cent the Government is asking from other banks in cash.

The company has since failed to convince shareholders that the after-tax rate of about 10 per cent makes the package cheaper than the Government's offer. This argument has fallen on deaf ears partly because Barclays will pay interest for longer than would be expected under the Government's plan.

Barclays investors including Legal & General and Aviva, who were given access to a £1.5bn offering that would leave them just ordinary shares, have complained that the funding from the Persian Gulf is not only too costly but will dilute their stakes.

Executives met the bank's biggest investors after announcing the plan last week. Their anger prompted the bank and the Gulf investors to yesterday open up as much as £500m of the £3bn of RCI. However existing shareholders will, to their continued frustration, not get potentially lucrative associated warrants being offered to the new entrants.

The current debacle erodes the goodwill built up in recent years by the board through the company's reasoned growth strategy and its deft handling of the ABN Amro situation last year. After agreeing to buy the Dutch bank ABN Amro for £45bn, the London-based lender kept its discipline and thought better than to enter a bidding war when Royal Bank of Scotland usurped its bid.

RBS, which overpaid for the Dutch lender in the three-way acquisition it undertook with Spain's Santander and the Belgian-Dutch bank Fortis, has been paying the price ever since with cash calls and writedowns, and Barclays had earned praise for leaving the Scottish bank with the poisoned chalice.

Mr Varley, as well as the president and head of Barclays Capital Bob Diamond, the finance director Chris Lucas and the head of retail banking Frits Seegers will all follow the lead set by other banks, including RBS, Germany's Deutsche Bank and Switzerland's UBS, to forego their bonuses for 2008.

Barclays: The big earners

* Bob Diamond: Heads up Barclays' investment banking activities. Joined the firm in summer 1996. In 2007 he earned £21m: basic salary of £250,000, a cash bonus of £6.5m, plus various other bonus components, mainly shares, worth £14.25m.

* John Varley:CEO since 1 September 2004. Last year earned £4.075m: base salary of £975,000, a cash bonus of £1.425m and various other bonuses – mainly made up of shares and options – worth £1.675m.

* Frits Seegers: Responsible for Barclays' retail and commercial businesses globally. Joined Barclays in July 2006 from Citigroup. Earned £4.051m: base salary of £700,000, a cash bonus of £1.313m, and an additional £2.038m mainly in shares and options.

* Chris Lucas: Finance director. In 2007 he earned £1.85m, made up of a £450,000 basic salary, a cash bonus of £450,000, then additional bonuses, mainly in shares and options, worth about £950,000.