• 26 Nov 2012 at 10:33 AM
  • Banks

Qatar Holdings Sells Its Barclays Warrants, Sort Of

Is there a better word in the English language than “monetize”?1 When you have a thing, and you would rather have money than that thing, you have about two choices, which are:

  • sell the thing, or
  • monetize the thing.

Choice one is straightforward and boring; choice two has the advantage of a wholly indeterminate meaning, plus sometimes you get your money and get to keep the thing. Anyway what happened here?

Qatar has cashed in its remaining warrants in Britain’s Barclays Plc, a move that should yield a $280 million profit and still leaves the sovereign wealth fund as the bank’s top shareholder following a controversial fundraising in 2008.

Deutsche Bank AG and Goldman Sachs Group Inc said they would sell up to 303.3 million shares – worth 740 million pounds – to comply with Qatar’s request. They sold shares at 244 pence apiece, a 4 percent discount to Friday’s closing share price, but did not confirm whether all the shares had been sold.

Qatar Holding said in a separate statement late on Sunday it had monetized its remaining holding of 379 million units of Barclays warrants – instruments that convert into shares – without affecting its 6.65 percent stake.

The warrants have not yet been converted, but can do so at 198 pence per share in the next year, which would reap a 180 million pound profit at current prices.

Notice:

  • Qatar has 379mm warrants that it can convert into 379mm shares on or before October 31, 2013.2
  • It hasn’t converted them.
  • Nor did it sell them in this offering.
  • It also has 800-odd million Barclays ordinary shares, but it didn’t sell them in this offering either.
  • Instead it sold shares that it didn’t have.
  • Monetizing!

It being England – and Barclays – the disclosure here is a little scanty and no one at the underwriters seems to want to call me back, but you can piece together what is happening here. There are two related options. One is static: Qatar sold 303 million shares for 244 pence a piece, for a total of £740 million, which happens to be right around enough (at present value) to pay the strike price on all 379 million warrants (which is actually £750 million on the nose, so Qatar would need to earn a high-ish 1.4% over the next year to pay the full strike). I suppose they could just put the money in a box, wait a year, and use it to pay the warrant strike price and get 379 million shares. 303 million of those go back to wherever they borrowed the short-selling shares from,3 and the anything they can get on the remaining 76 million shares – even a penny a share – is further profit. Though of course they have to sell them, which is awkward because everyone’s all “wait didn’t you get rid of these warrants last year?” and they’re all “no, we monetized them, totally different.” Of course if the stock is down to a penny a share then their right move is to not exercise the warrants and buy in the shorts at a penny a share. But either way they’re okay; they’ve cashed out their £740 million and no one can take it away from them. This is not economically optimal, but it’s relatively easy and, if you got your warrants for free in a transaction now being investigated for fraud, you might be okay with it.

Alternatively Qatar could be dynamically hedging. The 303 million shares is 80% of the total shares underlying the warrants, versus a theoretical delta – according to Bloomberg – of 74%, which I guess is close enough.4 And now they can dynamically hedge until maturity, which should – theoretically! – protect them from any price risk on Barclays shares. If the stock stays in the well-above-200-pence area, they’ll keep selling over time until, in October 2013, they’ll have sold the full 379 million shares short and they’ll exercise the warrants, get those shares, and deliver them to their share lenders to close out their short. In which case this would not be quite 100% right:

The sale “does remove the last bit of overhang from the 2008 recapitalization,” Sandy Chen, an analyst at Cenkos Securities in London who recommends selling the shares, wrote in a note to clients today.

On the other hand, if the stock drops between now and then, their delta will go down and they’ll have to buy in some of the shares they’ve shorted, which I guess will do a little to prop up the stock.

When I say “they,” incidentally, I don’t need to mean Qatar Holdings: it could be them, or their bookrunners at Deutsche Bank or Goldman, or various combinations and intermediates. DB and GS are basically in the business of dynamically hedging options and Qatar Holdings basically are not, so it would make sense for them to be doing the actual buying and selling. There are various ways to get there: Qatar could have kept the warrants and entered into an offsetting option contract with GS and DB in which GS and DB, rather than Barclays, are selling the shares short. Among other things this might help with the FSA short sale disclosure regime since GS and DB are market makers.

Or I guess Qatar could have just actually sold their warrants to Deutsche Bank and Goldman, who are hedging and monetizing them themselves. That would make sense too. But then they’d have just said that – “we sold our warrants” – rather than the more delightful and inscrutable “monetization.”

Qatar cashes in Barclays warrants, shares drop [Reuters]
Qatar Disposes of Barclays Warrants, Holding 6.7% Stake Steady [Bloomberg]
Qatar Holding Monetises Barclays Warrants [Qatar Holding]

1. I mean, “monetise”? The text will pretend we’re in America, sorry.

2. Details in page 18 of latest 20-F, or the 2008 announcement of the investment if you want.

3. I’ll just throw out there that if the answer was, somehow, “themselves” – i.e. they borrowed from their own pool of 800mm ordinary shares that they hold long – I would not be, y’know, blown away with surprise, though that would be a rather advanced move.

4. From Bloomberg:

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Comments (11)

  1. Posted by ******** | November 26, 2012 at 10:58 AM

    I wish Matt had been able to monetize me.

  2. Posted by guest | November 26, 2012 at 11:50 AM

    So they either hedged their risk or alternatively dynamically hedged their risk?

  3. Posted by guest | November 26, 2012 at 1:22 PM

    well done Shelock

  4. Posted by Guest | November 26, 2012 at 1:39 PM

    I don't really get this but it sounds like heads you win, tails I lose!

    -Main Street

  5. Posted by Speckled Band | November 26, 2012 at 1:43 PM

    You too, Wason

  6. Posted by UBS Equities S&T | November 26, 2012 at 1:44 PM

    Definitely didn't understand any of this.

  7. Posted by guest | November 26, 2012 at 1:47 PM

    Well played

  8. Posted by 2 cubes over | November 26, 2012 at 3:34 PM

    Between FTAV & ML's posts I can always feel superior to my coworkers.

  9. Posted by Guest | November 26, 2012 at 4:22 PM

    They sold the warrants and kept the shares. The banks bought the warrants and placed their delta. End of story.

  10. Posted by sohbet | May 12, 2013 at 7:18 PM

    bookmark worthy in my opinion. It’s worth saving for future reference. It’s fascinating reading with many valid points for contemplation. I have to concur on almost every point made within

  11. Posted by العاب تلبيس بنات | July 15, 2013 at 9:00 AM

    العاب تلبيس بنات http://www.girls-gamess.com/