RBS 2009 Annual Report Download - page 369

Additional information
367RBS Group Annual Report and Accounts 2009
the Contingent B Shares in no fewer than two tranches of £6 billion and
£2 billion (or such smaller amounts as the company and HM Treasury
may agree). Any unused portion of the £8 billion may be subscribed in
one or more further tranches.
The company may, subject to certain conditions, at any time terminate
the Contingent Subscription in whole or in part, with the consent of the
FSA. The company is required to pay an annual fee, for the Contingent
Period, in relation to the Acquisitions and the Contingent Subscription of
£320 million less four per cent. per annum of the value of any B shares
subscribed for under the Contingent Subscription. Such fee is payable
in cash or, with HM Treasury’s consent, by waiving certain UK tax reliefs
that are treated as deferred tax assets or through a further issue of B
shares to HM Treasury. The annual fee ceases to be payable on
termination of the Contingent Subscription and if the company
terminates the Contingent Subscription in part, the fee will reduce
proportionately.
The company gave certain representations and warranties to HM
Treasury on the date of the Acquisitions and Contingent Capital
Agreement, on the date the circular was posted to shareholders, on the
first date on which all of the conditions precedent were satisfied, or
waived, and on the date of the Acquisitions. The company has agreed
to give such representations and warranties again on each date (if any)
a Contingent Subscription is triggered and on each date (if any) on
which B shares are issued pursuant to a Contingent Subscription.
The company agreed to reimburse HM Treasury for its expenses
incurred in connection with the Acquisitions and agreed to do so in
connection with the Contingent B shares, if the Contingent Subscription
is exercised.
The company agreed to a number of undertakings, including with
respect to: (i) restrictions on the payment of dividends or other
distributions on, and the redemption of, certain securities; (ii)
expectations regarding the repurchase of the B shares by the company;
(iii) renegotiations of the terms of the Contingent Subscription as a
result of future legislative or regulatory changes; (iv) negotiating in good
faith to maintain the status of the B shares and Dividend Access Share
as Core Tier 1 capital; and (v) restrictions in relation to the company’s
share premium account.
HM Treasury has agreed to waive its statutory pre-emption rights arising
out of the B shares and the Dividend Access Share in respect of any
future issue of equity securities by the company other than B shares
and has agreed to vote its B shares and the Dividend Access Share, as
applicable, in favour of each special resolution to disapply its pre-
emption rights under the B shares and/or the Dividend Access Share
then held by HM Treasury every time they arise. The pre-emption rights
arising out of the B shares and the Dividend Access Share will also be
disapplied in the Articles of Association.
HM Treasury has agreed that it shall not be entitled to exercise its option
to convert B shares into ordinary shares to the extent that it holds more
than 75 per cent. of the ordinary shares of the company or to the extent
that the exercise of such option would result in it holding more than 75
per cent. of the ordinary shares of the company.
HM Treasury has agreed that it shall not be entitled to vote the B shares
or the Dividend Access Share to the extent that votes cast on such
B shares and the Dividend Access Share, together with any other votes
which HM Treasury is entitled to cast in respect of any other ordinary
shares held by or on behalf of HM Treasury, would exceed 75 per cent.
of the total votes eligible to be cast on a resolution proposed at a
general meeting of the company.
For as long as it is a substantial shareholder of the company (within the
meaning of the UKLA’s Listing Rules), HM Treasury has undertaken not
to vote on related party transaction resolutions at general meetings and
to direct that its affiliates do not so vote.
Accession Agreement
The company acceded to the APS through an accession agreement (the
“Accession Agreement”) entered into with HM Treasury, which became
effective on 22 December 2009. The Accession Agreement incorporates
the terms and conditions of the APS set out in the document entitled
‘UK Asset Protection Scheme Terms and Conditions’ which is available
on HM Treasury’s website (the ‘Scheme Conditions’). The Accession
Agreement which incorporates the Scheme Conditions is accounted for
as a credit derivative and it tailors the APS to the company (by, amongst
other things, setting applicable bank-specific thresholds and addressing
a limited number of other bank-specific issues).
Under the APS, HM Treasury is liable to make payments to the company
in respect of a pre-defined pool of assets and exposures (the “Covered
Assets”) in respect of which a specified failure to pay, bankruptcy or
restructuring trigger occurs or is deemed to occur. Payments under the
APS are intended to protect the company, over time, for 90% of the
amount by which cumulative losses on the whole portfolio of Covered
Assets (as reduced by cumulative recoveries on the portfolio) exceed a
fixed first loss threshold of £60 billion. Cumulative losses (as reduced by
cumulative recoveries) below the first loss threshold, and a 10% vertical
slice of any cumulative losses (as reduced by cumulative recoveries)
exceeding the first loss threshold, are for the account of the company.
Protection under the APS is, subject to various requirements under the
Scheme Conditions, provided in respect of the Covered Assets on the
company’s consolidated balance sheet as at 31 December 2008 with an
aggregate covered amount of £282 billion. Protection under the APS
may be lost or limited in certain specified circumstances, including the
failure of a Covered Asset to satisfy certain asset eligibility criteria set
out in the Scheme Conditions.
During the life of the APS, the company will pay HM Treasury a non-
refundable annual fee (payable in advance) of £700 million per annum
for the first three years of the APS and £500 million per annum until the
earlier of (i) the date of termination of the APS and (ii) 31 December
2099. The annual fee can, subject to HM Treasury’s consent, be paid
wholly or partly by means of the waiver of certain UK tax reliefs that are
treated as deferred tax assets or funded by the issuance of additional
B shares to HM Treasury.