City fury over terms of Barclays bailout

Barclays faces the possibility of an investor revolt after announcing it is taking cash from Middle-Eastern investors, at a hefty cost, as an alternative to accepting the UK government bailout which its rivals HBOS, Lloyds and Royal Bank of Scotland are benefiting from.

The bank, which last month turned down the Government bailout offered to the sector, announced yesterday that it will raise £7.3bn from investors in Qatar and Abu Dhabi. Existing shareholders in the bank still need to approve the proposal on 24 November – and that may not go through without protest judging by yesterday's fall in the bank's share price. The stock fell by as much as a fifth before closing 13 per cent lower.

Some politicians also waded into the bank's business, with the Liberal Democrat Treasury spokesman Vince Cable branding the deal a "scandal of mammoth proportions".

Barclays, whose chief executive, John Varley, pictured, has been coming under increasing pressure, said last month it would raise capital privately, while rivals Royal Bank of Scotland, Lloyds TSB and HBOS agreed to take up to £37bn of taxpayers' funds to help rebuild balance sheets that have been badly hit by the credit crisis and to prepare for possible recession.

That could leave the Government as a majority shareholder in RBS and with over 40 per cent of a combined Lloyds/HBOS. Ministers have said they will limit executive pay and halt dividends for shareholders until preference shares are repaid, but said it would not interfere with strategy.

Barclays executives said they think the bank should gain a competitive advantage "in the current market landscape" by not having the Gov-ernment limiting its nimbleness.

The resulting transaction will leave Middle-Eastern investors with a substantial chunk of Barclays. Under the plan, the bank is paying 14 per cent interest for 10 years on some of the preferred-like shares being used. 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.

While the company argues the after-tax rate of about 10 per cent is cheaper than the Government's offer, some analysts say Barclays will probably be continuing to pay the interest for six more years than its peers. And analysts at Collins Stewart said they estimate that, including banker and adviser fees and other initial extras, Barclays will actually end up paying the equivalent of about 16 per cent interest in the first year.

"Government intervention is being avoided, albeit at a very high cost," Collins Stewart's Alex Potter said.

Middle East investors will own up to one-third of the UK's second-largest bank after the operation, which is aimed at repairing damage from the global financial crisis. Barclays will get up to £3.5bn as a personal investment from Sheikh Mansour Bin Zayed al Nahyan, one of the brothers of Abu Dhabi's ruler – and as of recently the owner of Manchester City football club. That could give him a double-digit stake in the company.

The bank is also raising up to £2bn from Qatar's sovereign wealth fund and £300m from a member of Qatar's royal family. That could eventually leave Qatar investors holding up to a sixth of Barclays shares.

Barclays' investor base has been transformed in the past two years as it has raised funds from investors in China, Singapore and Japan as well as the Middle East, and the bank expects to benefit commercially from the links, as well as getting cash. Barclays said profit in the first nine months of this year was "slightly ahead" of the same level a year earlier.

Banks have been appealing to investors from Asia and the Middle East for capital for months as the credit crunch takes its toll, but cash is becoming costlier as funds that helped European and US banks at the beginning of the credit crunch and made huge losses are becoming harder to convince to part with their money.

Barclays is structuring the fundraising through a range of complex capital instruments that will allow it to rebuild capital to levels required by the UK regulator without taking advantage of taxpayer cash. The bank is raising £3bn through an issue of reserve capital instruments (RCIs) that will pay annual interest of 14 per cent until June 2019. Convertible notes will make up the remaining £4.3bn.

Barclays has already lost billions of pounds from credit-related asset writedowns and is faced with a sharply slowing UK housing market and economy. In July, the bank had already raised £4.5bn from shareholders to prop up its capital base. It wrote down a net £129m on credit market assets for the third quarter. The number was that small because £1.2bn of total writedowns were offset by a gain of £1.1bn on an upward revaluation of some issued notes.