RBS Debt to British Taxpayer Threatened by Scottish Vote


U.K. taxpayers are seeing the chance of recouping their money from the world’s biggest bank bailout recede as Scottish voters stand on the brink of dissolving the 307-year-old union.

Royal Bank of Scotland Group Plc shares have erased most of the gains made this year, with a weekend survey showing nationalists wanting to quit the U.K. overtaking the No campaign for the first time this year. The cost of insuring RBS bonds against default rose 6 basis points to 79 yesterday, the worst performer in the Markit iTraxx Senior Financial Index.

Investors are becoming increasingly concerned about the outcome of the Sept. 18 referendum as RBS, 80 percent owned by the government, is the second-largest lender in Scotland behind Lloyds Banking Group Plc (LLOY), analysts estimate. While the U.K. government has sold 7.4 billion pounds ($12 billion) of Lloyds shares, it has been unable to sell its stake in RBS as the stock remains below the price where taxpayers will break even on their 45 billion-pound bailout in 2008.

“If there’s a Yes vote it will undoubtedly have to defer the timeframe for the stake being placed until things become clearer about the future of Scotland and the shape and structure of RBS,” said Simon Willis, an analyst at Daniel Stewart Securities Plc in London. “Equally, it’s difficult to believe investors would be happy to take part in a further placing of Lloyds with their future being very uncertain.”

Shares Decline

RBS, led by Chief Executive Officer Ross McEwan, has lost 5.6 percent since Aug.. 29. The shares plummeted as much as 3.9 percent yesterday, the largest intraday decline since February, and closed 1.3 percent lower at 342.50 pence.

They erased earlier losses after bank announced it’s seeking a valuation of as much as $14 billion in an initial public offering of Citizens Financial Group Inc., its U.S. consumer-lender subsidiary. At the high end of its proposed price range, the bank would raise $3.5 billion.

Lloyds dropped 2.4 percent to 72.20 pence after slumping 3 percent last week. The two banks are the worst performers on the Bloomberg Europe Banks and Financial Services Index since the start of the month.

The extra yield investors demand to hold RBS 6 percent bonds due in 2023 instead of similar maturity government debt jumped 16 basis points yesterday to 281 basis points, Bank of America Merrill Lynch index data show.

RBS and Lloyds declined to comment on the Scottish vote. Dan Yea, a spokesman for U.K. Financial Investments Ltd., which manages the government’s holding in the banks, also declined to comment on the timing of share sales.

‘Parlous State’

RBS has at least 14 billion pounds of consumer and business loans, compared with 26 billion pounds at Lloyds, analysts at Credit Suisse Group AG said last week. Douglas Flint, chairman of HSBC Holdings Plc (HSBA), said a Yes vote could leave the financial system in a “parlous state.” and Goldman Sachs Group Inc. said a breakup of the U.K. may lead investors and retail customers to abandon the new country.

“There’s a massive amount at stake,” said Chris Wheeler, a London-based analyst at Mediobanca SpA, which has a neutral rating on RBS shares. The vote “now has got too close to call and the cost is going to be substantial. The shares are going to be down five to 10 percent on Sept. 19 if there’s a Yes vote.”

The government’s remaining 25 percent stake in Lloyds now trades lower than the 75.50 pence price at which it sold 4.2 billion pounds of shares in March.

Pound Weakens

The vote on Sept. 18 could hand victory to the Scottish National Party led by Alex Salmond, a former economist at RBS in the 1980s, and set Edinburgh on the path to become Europe’s newest capital city. The pound slid to its weakest level since November against the dollar yesterday.

U.K. and Scottish policy makers would negotiate the terms for splitting the two nations over an 18-month period, the semi-autonomous Scottish government said in November. It wants March 24, 2016, to be its independence day, and RBS executives say this period should cushion the lender from any immediate shock after the election.

“There’s really no difference before or the day after,” McEwan, 57, told reporters at a conference July 25. “All we’re trying to create is a stable position for all people in Scotland so that they know that this bank, no matter what happens the day before, the day of or day afterward, is a stable platform there for them.”

Independence could come at a cost to Scotland’s financial-services industry, which contributed 8.8 billion pounds to the nation’s economy in 2010 and provides jobs for as many as 100,000 people. RBS, with a sprawling headquarters on the outskirts of Edinburgh, employs about 12,000 in the country.

“In the case of a Yes vote, the banks are among the most impacted,” said Olivia Frieser, London-based global head of credit research at BNP Paribas SA. “As a bondholder you have uncertainty. Everything else remaining equal, you would rather be in the English entity than the Scottish one.”


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