RBS writes down £1.36bn of LBO debt

The UK bank has written down £5.9bn in leveraged loans, structured credit vehicles and US residential mortgages, as it embarks on a £12bn rights issue and looks to shore up its weak balance sheet.

RBS, the UK bank, is going to tap public markets for a £12 billion (€15 billion; $23.8 billion) rights issue after making net write-downs of £5.9 billion before tax, according to a trading statement. Net of tax the bank will write down £4.3 billion.

RBS: £1.36bn
loan write-downs

The bank has written down £1.36 billion of debt related to leveraged loans, although it received £470 million from credit default swap hedges on leveraged loans. After the write-downs the group has £12.35 billion exposure to funded and unfunded leveraged loans and £1.21 billion exposure to CLOs. It wrote down its funded and unfunded leveraged loans from an average price of 96 percent to face value to 88 percent and its CLOs from 93 percent to 87 percent.

RBS is looking to set up a fund to provide private investors with an opportunity to invest in its leveraged loan portfolio and to take pressure off its balance sheet, according to Bloomberg, the US news agency. RBS did not mention the fund in its statement and a spokeswoman declined to comment about the fund.

The bank also wrote down £1.37 billion related to US residential mortgages as well as £3.64 billion related to asset backed securities CDOs. The bank has also raised £4 billion from disposals of non-core assets net of tax.

RBS has one of the lowest core capital ratios in the banking sector at around 4 percent following its £47 billion acquisition of ABN Amro, alongside Banco Santander and Fortis, as well as the subsequent write-downs. The bank said in a statement it would revise its targets for its capital ratios maintaining a core Tier 1 capital ratio of more than 6 percent at 31 December 2008. RBS’ previous capital plan had been to rebuild its core Tier 1 capital ratio towards 5 percent by 2010.

The issue is being made on the basis of 11 new shares for every 18 existing shares at an issue price of £2.00 per RBS share. This represents a 34.9 percent discount to the theoretical ex-rights price, or the market price to which the shares should gravitate to following the issue, and a 46.3 percent discount to the closing price of RBS shares yesterday.

RBS shares dropped 3.69 percent to £3.59 per share at 1108BST.