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Buy-out funds are not the only ones finding it more difficult to secure the financing they need. While the consortium led by Royal Bank of Scotland is in pole position to win the bid battle for Dutch bank ABN Amro, raising the capital is looking trickier – and more expensive – by the day.
It is hardly ideal timing for RBS and Fortis to raise a planned €22bn in ordinary shares. Bank stocks have been punished for their exposure to the credit markets, and have underperformed the broader market globally by more than 7 per cent since the beginning of June.
But the bigger challenge is likely to be raising the roughly €10bn of tier one capital in the form of preference shares needed by RBS and Fortis (about €5bn each). Bank issuance of pref shares, which offer an attractive means of meeting regulatory capital requirements, reached a record €64bn globally last year, according to Dealogic. Even before recent market ructions, the consortium’s pref share target looked a very large bite. But institutional appetite has dwindled after the subprime crisis: spreads over the London interbank offered rate have more than doubled as a result. The US retail market remains open, indeed rival bidder Barclays itself raised $1.2bn of prefs there last week. Quite how deep that market will prove is debatable, particularly if it becomes one of a shrinking number of options open to banks keen to bolster their balance sheets following recent travails.
That makes it hard to estimate how much the consortium’s costs are likely to rise. Staggering pref issues is one tactic, and both RBS and Fortis appear to have some leeway from regulators regarding how quickly they must rebuild their capital ratios. Perhaps some of the hedge funds with big bets on the ABN deal being completed may be willing to buy some attractively priced pref shares to help it on its way.