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RBS to Raise $24 Billion Due to Credit Problems

Royal Bank of Scotland announced a record 12 billion pound ($24 billion) rights issue to cover a potential 5.9 billion pound writedown on the value of toxic assets and help rebuild a stretched balance sheet.

A Royal Bank of Scotland logo is seen outside the company's offices in central London, Tuesday May 29, 2007. A consortium led by Royal Bank of Scotland PLC said Tuesday it will launch a hostile bid of euro71.1 billion (US$95.5 billion) for ABN Amro, topping a friendly offer from Barclays PLC and pressing Bank of America Corp. for control of the Dutch bank's U.S. arm. (AP Photo/Matt Dunham)
Matt Dunham
A Royal Bank of Scotland logo is seen outside the company's offices in central London, Tuesday May 29, 2007. A consortium led by Royal Bank of Scotland PLC said Tuesday it will launch a hostile bid of euro71.1 billion (US$95.5 billion) for ABN Amro, topping a friendly offer from Barclays PLC and pressing Bank of America Corp. for control of the Dutch bank's U.S. arm. (AP Photo/Matt Dunham)

RBS said on Tuesday it also expects disposals to generate 4 billion pounds in core capital by the end of this year and could sell all or part of its insurance business.

RBS will offer 11 new shares for every 18 existing shares at 200 pence per share in the rights issue, Europe's biggest ever, representing a 46 percent discount to Monday's closing price.

RBS shares closed 3.9 percent lower at 358 pence, valuing the bank at about 37 billion pounds. The theoretical ex-rights price for the shares is 307p, according to Reuters calculations.

"It's a reassuring discount, and investors will be pleased that it's such a large amount and not 5 or 6 billion -- they want RBS to raise some money so that the company can move forward," said Mark Sartori, head of European trading at Fox-Pitt, Kelton.

The bank said it had assumed there will be additional hits to the value of assets, including the ABN Amro wholesale business it bought last year, due to the impact of the U.S. subprime mortgage crisis and subsequent credit crunch. It estimated the effect of writedowns on core capital will be 4.3 billion pounds net of tax, or 5.9 billion pounds before tax.

Both the rights issue and writedown were no surprise after several days of widespread speculation, but they mark an abrupt U-turn for RBS after it said earlier this year it did not need to raise capital.

The bank's chairman said Chief Executive Fred Goodwin and other executives had the board's support, after some investors called for heads to roll.

"The board unanimously believe that our executive team has all the ability to steer the bank successfully through this tricky period in financial markets," Chairman Tom McKillop told reporters on a conference call.

"This is the time for us to get going and deal with the situation."

McKillop said he was confident the rights issue would be supported following feedback from advisers. "We don't really have serious concerns there won't be support," he said.

Britain's second biggest bank said it plans to keep core tier 1 capital in excess of 6 percent, which would make it one of Europe's best capitalised banks. The ratio stood at 4.5 percent at the end of 2007, one of the lowest in Europe.

Banks