Gulf investors back Barclays and British economy

Silver lining: Barclays Bank, unlike other leading banks in the country, chose to seek extra capital from foreign investors.

Gulf investors, including Sheikh Mansour bin Zayed, Abu Dhabi's Minister of Presidential Affairs, are preparing to invest up to £7.3 billion (Dh43bn) in Barclays Bank, Britain's second-largest bank. The move is seen as a confidence boost in the beleaguered British economy, days before a visit to Abu Dhabi by Gordon Brown, the British prime minister. Sheikh Mansour is paying up to £3.5bn in a personal capacity for a 16.3 per cent stake and becomes the bank's single largest shareholder in the process. The other investors are the Qatar Investment Authority and Challenger, the Qatar royal family's investment arm. The deal could leave Gulf investors with a 32 per cent stake in the bank if they exercise all their options. Barclays market capitalisation is now just £14.97bn, having declined by nearly 65 per cent this year.

"His Highness Sheikh Mansour bin Zayed Al Nayhan and his fellow Gulf investors, most especially the Qatar Investment Authority, can obviously choose to put money into any investment in the world," said Ali Jassim, an adviser to the Sheikh in a statement reported by Bloomberg. "This investment in a major British bank reflects their confidence in Britain." Barclays Bank, unlike other leading banks in the country, chose to seek extra capital from foreign investors rather than tapping the British government for funds. The bank's executives said that they took this route because it would offer the bank "self-determination".

"I think very differently about the nature of those commercial opportunities [that this deal offers] than I do about the possibility of having the UK government among our shareholders," said John Varley, the chief executive of Barclays. "In normal circumstances, independence with regards to dividend and strategy is important, and it is particularly true in such times of flux in the industry." Banking analysts had a mixed response to the announcement, although most agreed that the investors had struck a hard bargain. "The first [natural] reaction has been relief that Barclays has managed to raise capital in these difficult times, [but] consideration of the cost has since intruded," said analysts at Bernstein Research.

On Friday, when news of the investment first reached the markets, Barclays shares closed down 26.4 pence, or 13 per cent, at £1.79, recovering slightly from an earlier intraday low of £1.60. Barclays will issue £3bn in reserve capital instruments, or RCIs, with an annual coupon of 14 per cent as well as £2.8bn in mandatory convertible notes, with a 9.75 per cent coupon, with the Gulf investors. In addition, it had planned a £1.5bn convertible bonds placement with institutional investors, but said after the close of business on Friday that it had only placed £1.25bn. Nevertheless, Barclays said the total issuance fully satisfies existing capital needs.

When the mandatory convertible notes are converted on June 30 of next year, and if warrants are fully exercised, the new ordinary shares held by the Gulf investors will amount to 31.8 per cent of the group's fully diluted share capital. Responding to suggestions that holding such large stakes the investors might demand more control over affairs, chairman Marcus Agius said sovereign wealth funds have a reputation for investment without interference. "We don't expect them to influence us in any way as to how we operate," he said.

Goldman Sachs International advised Sheikh Mansour on the investment. Barclays has until the end of the year to meet new capital requirements set in October by the British government. The bank bought Lehman Brother's North American unit after the New York-based securities firm filed for bankruptcy protection on Sept 15, and is optimistic about its performance. The business "is better than our expectations", said Rich Ricci, the chief operating officer of Barclays Capital, who is running the integration of the American business.

* with agencies [e-mail]