FSA delays Pru’s record-breaking rights issue

Posted by Admin on May 5, 2010 in Stock Market | 0 comments

Last minute intervention by the Financial Services Authority has led to a delay in the announcement by the Prudential of its record-busting £14bn sale of new shares.

The Pru was hoping to announce the share sale this morning at 0700 BST.

But late last night, it was told by the FSA that the announcement would have to be delayed.

The Pru is raising the money to finance its £23bn takeover of AIA, the Asian offshoot of AIG, the battered US insurer.

I am told that the FSA, the City watchdog, raised concerns about the so-called capital structure of the Prudential as enlarged by the enormous takeover.

Or to put it another way, the FSA remains to be convinced that the Pru will be strong enough in a financial sense when the deal has gone through.

According to a source close to the transaction, the FSA has been less than enthusiastic about the deal from the outset – largely because the bulk of its operations will be in Asia, a long way from both the Pru’s HQ and from the FSA.

This is deeply frustrating for the Pru’s management – though the Pru is hopeful that the delay will be temporary, perhaps just a day or two.

The Pru believes that both it and AIA are among the best capitalised groups in the world.

However it understands why the FSA would be cautious and conservative in the process of approving the deal.

The dispute over the capital adequacy of the enlarged group relates to the provision of the Insurance Groups Directive.

The regulator has been massively criticised for failing to ensure that banks had enough capital in the run-up to the banking crisis of 2008. In particular, it permitted Royal Bank of Scotland’s capital ratios to become wafer-thin on some measures following RBS’s massive acquisition of the rump of the Dutch bank ABN.

Financial executives say, however, that if the FSA is seen to be too restrictive of financial firms in London, some may relocate to other financial centres.

The Pru for example, once it is perceived to be a largely Asian group, could move its HQ to Singapore.

Update, 09:08: Very interesting interview with Robin Geffen of fund managers Neptune on Today.

He fears the consequences for the Pru’s financial strength of its likely sale of its UK operations.

For the avoidance of doubt, I do not expect the Pru to announce the sale of its historic domestic business when it finally publishes the rights issue details.

But the eventual disposal of the 140-year-old mother operation remains highly likely, after the AIA deal closes.

As Geffen says, the relevant facts for investors like him about AIA and the Pru’s existing Asian business is that they consume cash – which is a corollary of their rapid growth.

Whereas the staid old British life and investment business is a useful generator of cash.

So some, like Geffen, will view the Pru as much less robust if it pulls out of the UK.

And, of course, there would be powerful symbolism if the Man from the Pru no longer had a significant property in Britain.

As for the FSA, would it make sense for it to be the Pru’s lead regulator, if the Pru no longer sold policies and investments in Britain?

The challenge for the FSA of monitoring the Pru in those circumstances might be deemed to be excessive.

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