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Barclays rights issue: a quick guide

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Barclays is raising £6 billion through a 'rights issue'. This video explains what this is and what it means to investors.

by Gavin Lumsden on Aug 02, 2013 at 12:30

Barclays rights issue: a quick guide

Rights issues are one of those occasions when the City seems to delight in confusing people with strange sounding jargon.

A rights issue is a way for a company to raise money from investors by issuing new shares. Barclays is the latest bank to shore up its finances in this way.

This video explains why rights issues get their name and how they affect shareholders.

This is the latest video in the Lolly Investor Programme, a weekly series aimed at beginner investors.

You can watch my recent videos here and find links to all the programmes in the series.

Can't watch now? Read my script instead

From time to time companies decide they need to raise money from their shareholders. They do this with a rights issue.

There have been many rights issues since the financial crisis, particularly by banks.

Barclays is the latest. It hopes investors will cough up £5.8 billion to buy new shares it plans to offer, making it the eleventh biggest rights issue in Europe in six years.

The rights issue is part of a package of measures by chief executive Antony Jenkins to find nearly £13 billion of extra capital City regulators insist the bank needs.

But why is it called a rights issue?

Because existing shareholders are being offered the right of first refusal, a bit like a landlord might offer tenants the chance to buy the property they live in.

Unlike most landlords though, companies are so keen for investors to buy the new shares they offer them at a cheap price.

Investors will be able to buy the new Barclays shares at 185p, 40% less than their closing price on the day before the announcement was made.

Companies also stipulate how many shares on offer in the rights issue. Barclays is offering one new share for every four investors own, for example.

Everyone likes a bargain but rights issues are unpopular with investors.

Barclays shares slumped at the news. 

This nearly always happens with companies doing rights issues. Look at what happened to RBS and Lloyds after their rights issues during the crisis.

There are two reasons.

Mounting a cash raid on shareholders is rarely a sign all is well with a business.

Secondly, a flood of new shares will always hit a share price and earnings per share. Just because Barclays will issue 3.2 billion new shares, an increase of 25%, doesn’t mean the bank is suddenly worth 25% more or generating 25% more profits.

Just think what would happen to house prices if there were suddenly 25% more properties on the market.

So what should investors do?

First of all, sit tight until a prospectus for the new shares is published.

The good news is the right to buy the new shares has a value investors can cash in. This means they have four options.

Shareholders can do nothing. In which case the company will sell the right to buy the new shares to another investor and give shareholders the money. However, their stake in the company is reduced.

Or they can sell the right to buy the shares through a stock broker. That way they know the price they will get.

Thirdly, they can subscribe to the share offer in full, but that could mean forking out a big slug of cash.

Alternatively, there is a way to take part in the rights issue without spending money! Some stock brokers will arrange to sell a sufficient number of your rights to the new shares and with that money, they will buy some of the new shares on your behalf.

It’s a cost-effective solution. Some people call it ‘tail swallowing’. I don’t know why! Rights issues are one of those occasions when the City loves to baffle people with jargon.

Hopefully, though, this has given you a better idea of what’s going on.

1 comment so far. Why not have your say?

Teo via mobile

Aug 07, 2013 at 13:34

Nice explanation, thanx!

I think one important info is missing though:

At which point in time you need to hold the shares, to "benefit" from the offer?

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