HM Treasury Asset Protection

RNS Number : 9136N

Royal Bank of Scotland Group PLC

26 February 2009

 



RBS GROUP INTENDED PARTICIPATION IN HM TREASURY ASSET PROTECTION SCHEME AND ADDITIONAL CAPITAL RAISING

Today RBS confirms its intended participation in H.M. Treasury's Asset Protection Scheme, in conjunction with an additional £13 billion capital raising. The agreement between RBS and the Treasury will, when completed, allow RBS to secure asset protection that enhances its financial strength and provides  improved stability for customers and depositors, and also enhances RBS' ability to lend into the UK  market. The agreement is subject to, among other things, shareholder approvals.

Issuance of Capital

On or after the implementation of the Scheme, the Treasury will subscribe for £13 billion of B Shares which will constitute Core Tier 1 capital. A summary of the expected terms of the B Shares is set out in Appendix 1. The Treasury will also commit to subscribe for an additional £6 billion of B Shares at RBS' option.

Scheme Amount

RBS intends to participate in the Scheme in respect of assets with a par value of £325 billion and a carrying value net of impairments and write-downs of £302 billion. 

First Loss

The agreement would see RBS bear the first loss amount relating to the assets in the Scheme up to £19.5 billion (after taking into account historic impairments and writedowns). Losses arising in respect of the assets after the first loss would be borne 90% by the Treasury and 10% by RBS. The Scheme will apply to losses incurred on assets on or after 1 January 2009.

Fee and Issuance of Capital

If it enters into the Scheme, RBS will pay a participation fee of £6.5 billion to the Treasury. This would be funded through the issuance of B Shares (in addition to, and on the same terms as, the B Shares referred to above), which will constitute Core Tier 1 capital. In addition, RBS will, over a period to be agreed, agree not to claim certain UK tax losses or allowances. 

Stephen Hester, Chief Executive of RBS Group, said: 

'Participation in this Scheme would assist us in reducing risk for shareholders whilst providing greater support for UK customers via increased lending. It would provide increased certainty to the market by limiting potential losses on a significant proportion of our balance sheet.' 

Assets

The assets would be drawn from RBS' and certain of its affiliates' portfolios of corporate and leveraged loans, commercial and residential property loans, structured credit assets and such other assets as the Treasury and RBS agree are to be included in the Scheme. It is also envisaged that the Scheme may include structured synthetic assets and counterparty risk exposures associated with certain derivatives transactions with monoline insurers and credit derivative product companies. RBS expects that the Scheme will protect: £225 billion of third party assets, £44 billion of undrawn commitments, and £33 billion in other counterparty risk exposures.

Lending

By participating in the Scheme RBS would be able to free up its lending capacity. Consequently,  RBS would increase its lending to UK homeowners and businesses who meet RBS' ordinary course credit and pricing criteria on RBS' normal commercial terms by £25 billion over the next 12 months. 

Where there is demand, the increased lending will be split £9 billion to mortgage lending and the remaining £16 billion to business lending. A further £25 billion increase is targeted in 2010. 

RBS is very much open for business and continues to provide funding support to personal and business customers. Its lending to business and commercial customers rose by 10% in 2008. 

RBS also takes an active role in providing Enterprise Finance Guarantee (EFG) lending. Since the launch of the scheme just over a month ago the value of EFG loans to be drawn down or in the pipeline with RBS totals £20 million. 

This latest commitment builds on RBS' recently announced pledge to guarantee overdrafts and pricing for small business customers until at least the end of 2009.  

Capital Ratios

The Scheme and associated capital raising is expected to improve the capital ratios at the RBS consolidated group level by (i) substituting government risk weighting for that of the relevant assets; and (ii) the subscription for the B Shares by Treasury (being both the B Shares issued in respect of funding the fee for the Scheme and the additional £13 billion of B Shares to be issued on or after the implementation of the Scheme) Based on total covered assets of £325 billion, RWA would reduce by approximately £144 billion.

In addition, RBS will continue to look at various market based and/or internal capital management opportunities to generate and further strengthen Core Tier 1 Capital.

Term

While it is intended that the Scheme would apply to the covered assets until their maturity, RBS' participation in the Scheme would be capable of termination by mutual agreement of RBS and the Treasury.

Management of the Assets

RBS would be required under the Scheme to manage the assets in accordance with certain asset management requirements as referred to in the Scheme. As the Scheme is intended to apply to losses on assets arising from 1 January 2009, RBS has today agreed with the Treasury certain interim arrangements relating to the management of those assets likely to be part of the Scheme. 

Conditions to accession to the Scheme

Implementation of the Scheme for RBS will be subject to further due diligence by the Treasury and its advisers, documentation and satisfaction of applicable conditions (including the application criteria and asset eligibility criteria of the Scheme) and conditions precedent to accession in the Scheme, including State aid, regulatory and shareholder approvals. 

2008 Accounts

It should be noted that there are no details about the Asset Protection Scheme in the 2008 Report and Accounts, which were approved by the Board on 25 February 2009. 

Appendix 1
Summary of Expected Terms of the B Shares

RBS DRAFT 3 (NV/PIRD): 26 February 2009

B Shares

Issuer	The Royal Bank of Scotland Group plc (the 'Company').
Securities:	Ordinary shares with preferential rights in respect of dividends ('B Shares'). The B Shares have no maturity and are irredeemable.
Nominal Value:	GBP 0.50 per B Share
Issue Price:	GBP 0.50 per B Share
Rights upon Liquidation:	On a return of capital or distribution of assets on a winding-up holders of B Shares will rank in the application of the assets of the Company available to shareholders pari passu with the holders of any other classes of ordinary shares of the Company.   For these purposes, on a winding-up, each holder of a B Share will be deemed to hold one ordinary share of the Company for every B Share held at the date of the commencement of such winding-up (the 'Winding Up Ratio').
Adjustments to the Winding Up Ratio:	The Winding Up Ratio shall be subject to anti-dilution adjustments.
Dividends:	Non-cumulative dividends will be declared at the discretion of the Board of Directors or a Committee thereof, which dividends shall be paid in priority to any dividend on any other class of ordinary share capital.   The Board of Directors or a Committee thereof shall, by 30th April in each year, decide whether or not to declare a final dividend or make a bonus issue on the ordinary shares in respect of the immediately preceding financial year. If it is decided that a final dividend on the ordinary shares is to be declared or a bonus issue is to be made in respect of the immediately preceding financial year, any dividend declared on the B Shares in respect of the same financial year will be declared at the same time. If it is decided that no final dividend on the ordinary shares will be declared or bonus issue made in respect of any financial year, the dividend on the B Shares in respect of such financial year will, if declared, be so declared no later than 30th April in the immediately following financial year provided, in each case, funds are available for distribution and are permitted by law to be distributed. The date on which the Board of Directors or a Committee thereof takes the decision to declare or not declare a dividend (in whole or in part) on the B Shares in respect of a year is referred to as a 'Declaration Date'.  If declared, dividends on the B Shares will be paid annually on the date that is three business days after the record date in respect of the final dividend payable on the ordinary shares in each year commencing in 2010, if such a dividend is declared, and otherwise on 31st May in each year commencing in 2010 (the 'Payment Date'). The record date for the B shares will be the same as the record date for any final dividend on the ordinary shares or otherwise shall be three business days before 31st May in each year. Any dividend payable on the B Shares in respect of the period from the date of their issue to 31 December 2009 shall be paid pro rata by reference to the number of days the B Shares have been in issue. Dividends on each B Share due on each Payment Date shall be equivalent to the greater of (1) 7% of the Issue Price per B Share and (2) if a dividend or dividends or other distribution is/are declared, paid or made on the ordinary shares in the period from (but excluding) the immediately preceding Declaration Date to (and including) the current Declaration Date, 250% (the 'Participation Rate') of the aggregate amount of such dividend(s) or distribution per ordinary share (the amount of any non-cash dividend or distribution being its market value). The Board of Directors or a Committee thereof may in its discretion decide that a dividend on the B Shares in respect of a year will not be declared at all or will be declared only in part even when distributable profits are available for distribution. If the Board of Directors or a Committee decides not to declare a dividend on the B Shares in respect of a year or declares a dividend only in part, then the rights of holders of the B Shares to receive the dividend in respect of that year on that relevant Payment Date will be lost either entirely or as to the part not declared, as applicable, and the Company will have no obligation in respect of the amount of dividend not declared either to pay the dividend in respect of that year on the relevant Payment Date or to pay interest thereon, whether or not dividends on the B Shares are declared in respect of any future years.
Adjustments to the Participation Rate:	The Participation Rate will be subject to anti-dilution adjustments.
Option to Pay in Scrip:	If the Board, or a Committee thereof, decides to declare a dividend on the B Shares in respect of a financial year and, either (i) no dividend has been declared on the ordinary shares and/or distribution made thereon in respect of the same financial year or (ii) a dividend has been declared and/or a distribution has been made thereon otherwise than in cash in respect of the same financial year, the Board or Committee may in its discretion determine that the dividend on the B Shares shall be paid in whole or in part by the Company issuing further B Shares to the Holders of B Shares. The number of further B Shares to be issued to each Holder as a bonus issue shall be such number of B Shares as shall be certified by an independent investment bank (acting as expert) to equal the value of the dividend otherwise payable on the B Shares.
Restrictions following non-declaration of dividends:	If dividends in respect of a year are not declared and paid in full on the B Shares in cash or otherwise, or the Company has not set aside an amount equal to the dividend for that year, the Company: may not pay dividends or other distributions (whether in cash or otherwise) upon any Parity Securities, including any dividends or distributions (whether in cash or otherwise) on ordinary shares payable by reference to the same record date as the B Shares, and the Company may not set aside any sum for the payment of those dividends or other distributions, unless, on the date of declaration of any such dividends or other distributions, the Company sets aside an amount equal to the dividend for the then current year payable on the B Shares to provide for payment in full of such dividend on the B Shares on the next Payment Date; or  may not redeem, purchase or otherwise acquire for any consideration any of its Parity Securities and shall not set aside any sum or establish any sinking fund for the redemption, purchase or other acquisition of Parity Securities,  until such time as the declaration and payment of dividends on the B Shares has resumed in full. 'Group' means the Company and its subsidiary undertakings. 'Parity Securities' means (i) the ordinary shares of the Company and (ii) any other securities of the Company or any other member of the Group ranking or expressed to rank pari passu with the ordinary shares and the B Shares on a return of capital or distribution of assets on a winding-up, either issued by the Company or, where issued by another member of the Group, where the terms of the securities benefit from a guarantee or support agreement entered into by the Company which ranks or is expressed to rank pari passu  with the ordinary shares and the B Shares on a return of capital or distribution of assets on a winding-up.
Conversion:	Holders of B Shares shall have the option to convert some or all of the B Shares into ordinary shares of the Company at any time at the Conversion Price provided, however, that all B Shares shall be automatically and mandatorily converted into ordinary shares at the Conversion Price if the volume weighted average trading price of the ordinary shares for 20 complete trading days in any 30 day trading period equals or exceeds GBP 0.65 per ordinary share. The number of ordinary shares to be delivered by the Company to a Holder of B Shares upon conversion of the B Shares shall equal the Conversion Ratio for each B Share held, rounded down to the nearest whole share.  As used herein: 'Conversion Price' means GBP 0.50 per ordinary share; and 'Conversion Ratio' means the Issue Price per B Share divided by the Conversion Price.
Covenants relating to conversion	The terms of the B Shares will contain standard covenants relating to the availability of ordinary shares and to listing in respect of any conversion to ordinary shares.
Restrictions on conversion:	Without prejudice to rights arising on the mandatory conversion of ordinary shares, HM Treasury shall not be entitled to exercise its option to convert B shares into ordinary shares for as long as it holds 75% or more of the ordinary shares or if the exercise of such option would result in it holding 75% or more of the ordinary shares.
Adjustments to the Conversion Price:	The Conversion Price shall be adjusted in accordance with standard Euro-market anti-dilution adjustments other than customary change of control adjustments or extraordinary dividend adjustments (to the extent compensated by dividends paid at the Participation Rate).
Voting rights:	Holders of the B Shares will only be entitled to receive notice of and to attend any general meeting of Shareholders and to speak or vote upon any resolution proposed at such meeting if a resolution is proposed either varying or abrogating any of the rights and restrictions attached to the B Shares or to wind up, or in relation to the winding-up of, the Company (and then in each such case only to speak and vote upon any such resolution).  If holders of the B Shares are entitled to vote upon a resolution proposed at a general meeting of Shareholders, on a show of hands every holder of B Shares who is entitled to vote or any proxy or a corporate representative for that holder, in each case who is present in person, will have one vote. On a poll, each holder of B Shares who is entitled to vote and who is present in person, by proxy or by corporate representative, will have two votes for each B Share of which he or she is the holder.
Purchase of own shares:	Subject to the Articles, the provisions of the Companies Acts, all other laws and regulations applying to the Company and the rights conferred on any other class of shares of the Company and confirmation from the FSA that it has no objection to the purchase (for as long as the Company is required to obtain such confirmation) the Company may at any time purchase any B Shares.
Share buybacks:	For as long as any B Shares remain outstanding the Company may not purchase any of its ordinary shares.
Restrictions on Voting Rights:	HM Treasury shall not be entitled to vote, whether on a show of hands or on a poll, in respect of ordinary shares acquired by it as a result of the conversion of B Shares into ordinary shares to the extent, but only to that extent, that votes cast on such ordinary shares, together with any other votes which HM Treasury is entitled to cast in respect of any other ordinary shares held by or on behalf of HM Treasury would exceed 75% of the total votes eligible to be cast on a resolution presented at a general meeting of the Company. For the avoidance of doubt, these restrictions shall not affect or limit any voting rights that HM Treasury may have in respect of any other class or classes of shares in the capital of the Company.
Amendments:	For so long as the B Shares are held by or on behalf of HM Treasury and in the event that the B Shares cease to be eligible as Core Tier 1 Capital then HM Treasury shall negotiate in good faith with the Company with a view to making such amendments to the terms of the B shares as may be necessary for the B Shares to constitute Core Tier 1 Capital.  'Core Tier 1 Capital' has the meaning given by the FSA from time to time.
No pre-emption rights:	Holders of the B Shares will not have pre-emption rights in respect of ordinary shares.
Listing:	The B Shares will not initially be listed. HM Treasury is entitled to require the Company to seek a listing of the B Shares.
Governing law:	The creation and issue of the B Shares and the rights attached to them are governed by, and shall be construed in accordance with, the laws of Scotland.

Contacts

Richard O'Connor

Head of Investor Relations

[phone]

For media enquiries:

Steven Blaney

Head of GBM Communications

[phone]

Piers Townsend

Head of GBM Media

[phone]

Certain statements made in this announcement constitute forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. Forward looking statements can be identified by the use of words such as 'may', 'will', 'expect', 'intend', 'estimate', 'anticipate', 'believe', 'plan', 'seek', 'continue' or similar expressions and relate to, among other things, risks concerning borrower credit quality, the performance of RBS's various business units in the near to medium term, the amount by which RBS expects to write down the value of certain of its assets, RBS's expectations in respect of the securities offering and its capital ratios, RBS's business strategy and its plans and objectives for future operations. Such statements are based on current expectations and, by their nature, are subject to a number of risks and uncertainties that could cause actual results and performance to differ materially from any expected future results or performance, expressed or implied, by the forward-looking statement. Factors that might cause forward-looking statements to differ materially from actual results, include but are not limited to: the extent and nature of future developments in the credit markets, including the sub-prime market, and their impact on the financial industry in general and RBS in particular; the effect on RBS's capital of write downs in respect of credit market exposures; RBS's ability to achieve revenue benefits and cost savings from the integration of certain of ABN AMRO's businesses and assets; general economic conditions in the UK and in other countries in which RBS has significant business activities or investments, including the United States; the monetary and interest rate policies of the Bank of England, the Board of Governors of the Federal Reserve System and other G-7 central banks; inflation; deflation; unanticipated turbulence in interest rates, foreign currency exchange rates, commodity prices and equity prices; changes in UK and foreign laws, regulations and taxes; changes in competition and pricing environments; natural and other disasters; the inability to hedge certain risks economically; the adequacy of loss reserves; acquisitions or restructurings; technological changes; changes in consumer spending and saving habits; and the success of RBS in managing the risks involved in the foregoing. These forward-looking statements speak only as of the date of this announcement. The information and opinions contained in this announcement are subject to change without notice and, subject to compliance with applicable law, RBS assumes no responsibility or obligation to update publicly or review any of the forward-looking statements contained herein.

 

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