RBS Royal Bank of Scotland Group PLC

   (FROM THE WALL STREET JOURNAL 3/18/16) 
   By Max Colchester 

Is the privatization of Royal Bank of Scotland Group PLC about to get even more complicated?

Eight years after pumping GBP 45.5 billion ($64.9 billion) into the lender, British taxpayers still own 73% of RBS. The bank's share price is languishing at about GBP 2.30, well below the GBP 5 level at which the government bailed it out. A looming vote over whether the U.K. will leave the European Union, wild market swings and plunging European bank shares have made big sales of RBS shares hard to contemplate.

One option being explored is selling bonds that convert into RBS shares if the stock rises above a set price in the future, according to people familiar with the matter. These "exchangeables," which normally mature over three to five years, would allow the government to raise funds without taking a huge paper loss on any share sales today.

UK Financial Investments Ltd., which manages the government's stake in RBS, said last year that it had considered using these "equity-linked bonds" when the government last sold off a piece of the bank.

Demand for these securities has been strong of late.

There are downsides to this tactic. If the shares don't hit the threshold, the U.K. government would still be left with its stake when the bonds mature. Some deals have been structured to force investors to swap in for stock regardless of where the share price stands when the bonds come due. But the coupons are high, at around 5% on similar deals, bankers say. Also, the government could place only about GBP 2.5 billion of these bonds in one offering, given demand for such issues. This is just a fraction of what it needs to sell.

But times are tough. On Wednesday, the U.K. Treasury said it aimed to recoup GBP 25 billion from RBS share sales by 2020. It had previously said it would sell "at least" that amount.

RBS is trading at levels last seen in 2012, hit by low interest rates and sizable restructuring charges. Last month, RBS delayed a pledge to start handing dividends to investors in the first quarter of 2017. Uncertainty over the size and timing of a huge fine to U.S. authorities over the sale of mortgage-backed securities hangs over the stock. Worryingly, RBS flagged problems with spinning out a portfolio of branches, a process that is proving expensive.

On Wednesday, the U.K. Treasury announced it was further pinching banks' ability to offset past losses against future profit for tax-calculation purposes. The move will hit RBS particularly hard.

(END) Dow Jones Newswires

March 18, 2016 02:47 ET (06:47 GMT)

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