RBS unveils $24 billion rights issue after fresh hit

LONDON (Reuters) - Royal Bank of Scotland (RBS.L) unveiled a record 12 billion pound ($24 billion) rights issue to cover increased writedowns on the value of toxic assets and help repair one of the sector's most stretched balance sheets.

Britain's second biggest bank said on Tuesday it would also sell assets to generate 4 billion pounds in core capital this year, mostly from the possible disposal of all or a stake in its insurance arm, which includes brands Direct Line and Churchill.

The biggest-ever rights issue and planned disposals will allow RBS to rebuild its capital reserves, which have been stretched by its part in last year's takeover of Dutch bank ABN AMRO and turmoil in financial markets in recent months.

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

The size of the extra shares alone would represent Britain's 30th-biggest company.

By 1520 GMT, RBS shares were down 4.7 percent at 355 pence, valuing the bank at 36 billion pounds. The theoretical ex-rights price for the shares is 307p, based on Monday's close.

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

RBS said it expects 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 5.9 billion pounds, or 4.3 billion pounds after tax.

The bank, which wrote down assets by 2.4 billion pounds last year, said the scale of its latest markdowns was conservative and had been checked by advisers. It valued below-prime Alt-A mortgages, for example, at 50 percent, down from 83 percent.

Analysts said any further big hits seemed unlikely.

Conditions in financial markets had deteriorated sharply in March and trading in parts of its investment bank arm had been hit by the turmoil, the bank said, but said overall recent trading had been satisfactory. It said expectations for 2008 were in line with the consensus market forecast.

U-TURN

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

RBS Chairman Tom McKillop told reporters on a conference call his board "unanimously" backed executives "to steer the bank successfully through this tricky period."

After some investors called for heads to roll, he staunchly defended under-fire Chief Executive Fred Goodwin.

"There is no single individual responsible for these events, and to look for a sacrificial lamb just misses the whole point," he said at a press conference. He also defended the strength and independence of the board, saying it contained "no patsies".

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.

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

Pressure has built on the world's largest lenders to shore up balance sheets battered by the credit crunch, at the same time that regulators are trying to unblock the credit pipeline.

The Bank of England on Monday unveiled an ambitious plan to swap banks' risky mortgage assets for at least 50 billion pounds of government debt, prompting speculation it had urged RBS and others to raise capital in return.

"This is very much the board's decision... we have not been asked to raise capital by anyone," McKillop said. "Historically RBS ran on very efficient balance sheets, but we've taken the decision that in today's world we need stronger capital ratios."

CEO Goodwin acknowledged he had supported a tighter capital base but said his stance had shifted. "The world has changed and when that happens you have to revisit all the assumptions you make, and for us the obvious one was capital," he said.

RBS said it will pay this year's interim dividend in shares, but planned a cash payout for the 2008 final dividend. It said a payout ratio of 45 percent was sustainable over the medium term.

Goodwin said RBS's stronger capital would encourage it to lend and help the economy, and said he was optimistic that the BoE measures would help relax strains in the mortgage market. Finance minister Alistair Darling met lenders on Tuesday to discuss the plan.

Analysts said now RBS has moved, other British banks could also bolster their balance sheets, notably Barclays (BARC.L) and HBOS HBOS.L. Shares in both banks fell on Tuesday.

RBS will seek shareholder approval for the rights issue in mid-May. It is being advised by Goldman Sachs (GS.N), Merrill Lynch MER.N and UBS (UBSN.VX). All are underwriting the issue and with sub-underwriters could receive up to 210 million pounds in fees.

(Additional reporting by Sitaraman Shankar; Editing by David Cowell/Andrew Hurst)