John Varley denies that capital raising is feather-bedding in disguise

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Barclays is understood to have approached existing shareholdersChina Development Bank, Sumitomo Mitsui Banking Corporation andTemasek, as well as other Russian, Asian and Middle Easterninvestors in a desperate bid to raise cash, but was turned down.Barclays then backtracked on plans announced three weeks ago toissue preference and ordinary shares, in favour of more generousterms for investors.
Retail shareholders, however, will be shut out of the capitalraising, diluting their investments in the bank. Institutionalinvestors were yesterday offered £1.5 billion worth ofconvertible notes which must be swapped into shares by the middleof next year.
The bank said this month that it would not join HBOS, Lloyds TSBand RBS in selling the Government preference shares with a 12 percent coupon.
John Varley, Barclays’ chief executive, said that havingtaxpayers as shareholders would have robbed the bank of its abilityto set its own strategy, while a traditional capital raising wouldhave exposed its share price to dangerous volatility. Barclayswants stronger ties to the Middle East as the West goes intorecession, he added.
With a government representative on the board, Barclays may alsohave struggled to rationalise the multimillion-pound bonuses paidto top executives such as Bob Diamond, the bank’s president,who last year took home £21 million in cash and shares.
The Government and the financial regulator have promised to crackdown on big payouts at banks that are struggling to get through thefinancial crisis. A rival banker said: “They’ve puttheir own personal position above the interests of theirshareholders. This is called feather-bedding.” But MarcusAgius, Barclays’ chairman, said: “It’s to do withself-determination and the ability to decide our owndestiny.”
Under the terms of the deal, Barclays will issue £3 billionworth of tax-deductible securities called reserve capitalinstruments (RCIs) paying a coupon of 14 per cent, as well as£3 billion in five-year warrants. Sheikh Mansour and the QIAwill be able to use the warrants to buy Barclays stock at 198p pershare. Yesterday the shares closed at 178.9p, down 12.8 per cent.
The bank will also issue £4.3 billion worth of mandatorilyconvertible notes (MCNs) - £1.5 billion of which were offeredto institutions. The MCNs pay 9.75 per cent and must be convertedto shares by June 30 next year at a cost of 153p per share.
Barclays insisted that the capital raising was no more expensivethan selling the Government preference shares. Mr Varley said thattax breaks on the RCIs, plus the cost of the associated warrants,would reduce the annual cost to about 13 per cent.
Analysts, however, derided Barclays’ calculation of the costof the warrants. They said that the Government would have allowedBarclays to redeem their preference shares within a few years,whereas Barclays has promised to pay a higher coupon on the RCIsfor at least ten years. “Thirteen per cent for ten years ismore than 12 per cent for two years however you look at it,”an analyst said.
The capital raising will cost £300 million, includingpayments to the Middle Eastern investors for negotiating the deal.
Herbert “Bart” McDade III, Lehman Brothers’president when it collapsed, has left Barclays Capital, whichbought the failed investment bank’s US capital marketsbusiness. Mr McDade was among the senior executives involved intalks to try to save Lehman Brothers.