Royal Bank of Scotland wins strong demand for first post-Brexit CoCo offer
The Royal Bank of Scotland (RBS) has raised an extra £2bn in emergency capital in the first round of fund raising for a UK lender since the EU referendum.
The bank, which performed badly in the recent European Banking Authority (EBA) stress tests, has sold $2.65bn (£2bn) worth of "Contingent Convertible capital notes" – or CoCos – to build up the capital reserves it can draw upon in a financial crisis and reduce the need to raise emergency cash or ask for taxpayer handouts.
CoCos are bonds which can be converted into shares if a bank needs to raise equity in times of stress. Regulators in the UK and Europe are thought to prefer them to more conventional debt as they offer an extra backstop to quickly raise capital buffers without the need for a panicked round of extra fund raising.
As long as a bank's capital buffer stays above seven per cent, CoCos behave as regular bonds, paying out interest and maturing over a set period of time. However, if the buffer shrinks below seven per cent those bondholders are then "bailed in" to the bank and the bonds transfer to shares, minimising the need for potential help from the taxpayer.
The bonds, which are typically more expensive for banks since investors are taking on an additional level of risk, were sold with an interest rate of 8.625 per cent. The sale follows a similar deal placed last summer in which RBS sold $3.15bn (at the time, £2bn) of two different kinds of CoCos at rates of 7.5 per cent and eight per cent. The Bank said it has no plans for an additional round of capital-raising.
The offer today was the single largest ever undertaken by a European lender and the first from a UK bank since the referendum. It also comes one week after the Bank of England unleashed its post-Brexit stimulus package, slashing interest rates to 0.25 per cent, launching another £70bn of quantitative easing, including a corporate bond-buying programme, and unlocking £100bn of newly-printed cheap cash for the UK's banks.
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RBS posted a £2bn loss in the first half of 2016 and has warned that post-Brexit low interest rate environment could mean it is unlikely to meet its previous targets over the next few years. Its shares were down 1.3 per cent at 192p in early morning trading.