News Column

Nils Pratley on Saturday Barclays: where smaller pies mean bigger slices for staff

February 8, 2014



?Tell us it's not true, saintly Antony. Have you really increased bonuses at Barclays' investment bank while revenues and profits are falling and shareholders are still digesting autumn's thumping pounds 6bn rights issue? Are you already taking a detour from the "multi-year path to reposition Barclays remuneration", as last year's annual report piously put it?

Barclays shareholders will learn on Tuesday with the full-year results that the reports are accurate. Chief executive Antony Jenkins and the board have indeed sanctioned an increase in bonuses at the investment bank in a year in which the unit's revenues fell.

In other words, the pie has shrunk in size but the well paid employees will receive a larger slice at the expense of investors.

That is not what Barclays promised. "I hope that 2012 will be seen as a turning point in the way Barclays approaches remuneration," Sir John Sunderland, chairman of the pay committee, wrote in last year's annual report.

"For 2012 and in future we are taking a different approach to the balance between directors' and employees' remuneration, and returns for shareholders."

Jenkins may offer various explanations. The blasted EU bonus cap has sown confusion and Wall Street rivals are exploiting the situation by waving large carrots at Barclays' most prized staff. Thus the bank has had to respond in kind to remain competitive.

This argument, as far as it goes, is coherent. It is true that the shareholders of JP Morgan et al are a feeble bunch and have been happy to let the bonus party roll on even as the bills for the last knees-up continue to pile up. Jamie Dimon's$20m (pounds 15m) pay packet after another year of litigation hell at JP Morgan is merely the most striking example.

But Jenkins should talk straight to his shareholders. He is clearly sincere about his clean-up programme; and he himself is prepared to share the pain for "legacy litigation and conduct issues" by declining a bonus for 2013. But is he also saying that Barclays, on pay, is still a prisoner of the demands of the senior staff in its investment bank? If so, where is the long-term gain for shareholders?

The unit occasionally, as in 2012, earns returns in excess of Barclays' cost of capital, the true measure of profitability. But if, in the "down" years, new-look Barclays still feels the need to play the greed game to retain a seat at the table, what is the point of staying in investment banking?

?Cold logic says AO, an online retailer of fridges, freezers and microwaves coming to the stock market next month, would be absurdly over-priced at pounds 1bn. The company made top-line profits of only pounds 10.7m last year on sales of pounds 275m and margins on electrical goods are notoriously thin for the retailer.

Gut instinct, however, says this flotation will generate a stampede of investors. AO is clearly a high-quality outfit. John Roberts, founder and 40% owner, has got something right if he has travelled this far on only pounds 3m of investment and no bank borrowings. This does not seem to be a business that requires vast sums of capital to expand.

The magic ingredients are claimed as smart logistics, proprietary IT and excellent customer service. All e-commerce companies make similar boasts, of course, but AO can at least point to proper profits, a rapid shift in its market towards online shopping and a route to expansion - Germany, in the first instance, plus the addition of TVs to the range.

To justify a pounds 1bn price-tag, you have to believe that AO's profit margins can rise substantially from last year's 3.8% with the benefits of greater size and that German expedition can be executed without cock-ups. Both propositions are untested and Dixons remains a strong competitor in the UK. So, in a rational world, pounds 300m-ish for AO would more fairly reflect the risks and potential rewards of investment.

But, if the stock market is willing to value loss-making Ocado at pounds 3bn, there will be buyers for AO at pounds 1bn.

?Stephen Billingham, chairman of pub landlord Punch Taverns, declared last month that it would be "economically rational" for all parties to agree the terms of his take-it-or-leave-it deal for bondholders to restructure pounds 2.3bn-worth of securitised debt.

It was quite a claim as there are 16 classes of bonds and agreement is needed from each. Unfortunately for Billingham, holders of too many of those bonds don't share his assessment of economic self-interest. One irate bondholder describes the terms as "unacceptable" and the documentation as "unsignable".

The chance of an 11th-hour agreement is roughly zero and the proposals will almost certainly be voted down next Friday.

Several wet towels are required to understand the technicalities of all the quarrels here. The heart of the problem is that Punch was designed at the outset by financial engineers who did a botch-job. The junior bonds still get some access to income in the event of a default, which confuses the traditional hierarchy of creditors.

Then matters became doubly complicated when some US hedge funds emerged as both shareholders and junior bondholders. It's messy.

But one principle should surely be supreme in any debt restructuring: shareholders, as suppliers of the first line of risk-capital, are wiped out first, or at least diluted hugely. Senior bondholders, gathered under the Association of British Insurers' umbrella, have been arguing that point all along. They have been right to do so.

The belligerent hedge funds who bought up Punch shares may have been gambling that, when push came to shove, fuddy-duddy ABI-types would roll over. The display of backbone by the ABI group should be applauded.

The danger after Friday's vote is that Punch defaults on its obligations, creating yet more mess and confusion for everybody.

But, if that happens, it's the shareholders who should be blamed.



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Source: Guardian (UK)


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