The RBS rights issue explained

What is a rights issue?

A rights issue is one of the methods companies use to raise cash. Existing shareholders are offered the opportunity to buy rights, which are effectively shares, in proportion to their existing holding. A rights issue is not open to new investors.
Why is RBS being forced to launch a rights issue?

Banks have to keep a certain amount of capital or cash in reserve in the event of unexpected losses. The most common way of monitoring a bank's cash reserves is through the "tier 1 ratio", a benchmark devised by the Financial Services Authority. According to analysts, RBS's tier 1 ratio is significantly below the European average, indicating its reserves are stretched to the limit. There are two possible reasons for this. First, RBS's joint takeover of ABN Amro for ?71bn (£56bn) last October, and second, the credit crunch. Most of the major UK and US banks have been forced to write down substantial assets since the start of the credit crunch last October. In the UK, banks are coming under particular pressure from the Government to reveal the true extent of their write-downs and capital positions. According to analysts, RBS is set to report further write-downs of between £4bn and £5bn on Wednesday.

How will the sale be structured?

According to the latest estimates, RBS is likely to raise as much as £13bn through a rights issue. If so, this will be the biggest rights issue in UK banking history. Until now, the largest rights issue that has taken place in the UK markets was when British Telecom went to its shareholders to raise £5.9bn in cash in 2001. The rights, or shares, will be sold to willing investors at a discount, which is usually between 30% and 50% of the share price at the time of the launch.

What role will Merrill Lynch and Goldman Sachs play?

Merrill Lynch and Goldman Sachs are among several banks that are understood to have agreed to underwrite the issue. This is a potentially lucrative role to play, as they are likely to get between 2% and 3% of the total value of the issue in fees. If RBS chooses to raise £13bn, they could pocket between £260m and £390m for underwriting the issue.

What does it mean for RBS customers?

Nothing will change for RBS customers. The move will only affect shareholders who may see their stocks change in value, and who will be offered the opportunity to buy rights.