RBS 2011 Annual Report Download - page 456

454 RBS Group 2011
Risk factors continued
The Group is subject to a variety of risks as a result of implementing the
State Aid restructuring plan and is prohibited from making discretionary
dividend or coupon payments on existing hybrid capital instruments
(including preference shares and B Shares) which may impair the
Group’s ability to raise new Tier 1 capital
The Group was required to obtain State Aid approval for the aid given to
the Group by HM Treasury as part of the placing and open offer
undertaken by the Group in December 2008, the issuance to HM
Treasury of £25.5 billion of B shares in the capital of the Group which are,
subject to certain terms and conditions, convertible into ordinary shares in
the share capital of the Group and a contingent commitment by HM
Treasury to subscribe for up to an additional £8 billion of B Shares if
certain conditions are met and the Group’s participation in the Asset
Protection Scheme (APS). In that context, as part of the terms of the
State Aid approval, the Group, together with HM Treasury, agreed the
terms of a restructuring plan.
As part of the State Aid restructuring plan, there is a prohibition on the
making of discretionary dividend (including on preference shares and B
shares) or coupon payments on existing hybrid capital instruments for a
two year period which ends on 30 April 2012. These restrictions prevent
the Group, the Royal Bank and other Group companies (other than
companies in the RBS Holdings N.V. group (which was renamed from
ABN AMRO Holding N.V. on 1 April 2010), which are subject to different
restrictions) from paying discretionary dividends on their preference
shares and discretionary coupons on other Tier 1 securities, and the
Group from paying dividends on its ordinary shares, for the same
duration, and it may impair the Group’s ability to raise new capital through
the issuance of ordinary shares and other securities issued by the Group.
The Group is subject to a variety of risks as a result of implementing the
State Aid restructuring plan, including required asset disposals. In
particular, the Group agreed to undertake a series of measures to be
implemented over a four year period from December 2009, including the
disposal of all or a controlling portion of RBS Insurance (with disposal of
its entire interest in RBS Insurance required by 31 December 2014),
Global Merchant Services (GMS), its interest in RBS Sempra
Commodities LLP, and the Royal Bank branch-based business in
England and Wales and the NatWest branches in Scotland, along with
the direct and other small and medium-size enterprise (SME) customers
and certain mid-corporate customers across the UK. While the disposal
of GMS is completed and the disposal of RBS Sempra Commodities is
largely completed, the sale processes in respect of the Royal Bank and
NatWest branch-based business and RBS Insurance continue to
progress. There is no assurance that the price that the Group receives or
has received for any assets sold pursuant to the State Aid restructuring
plan will be or has been at a level the Group considers adequate or which
it could obtain in circumstances in which the Group was not required to
sell such assets in order to implement the State Aid restructuring plan or
if such sale were not subject to the restrictions contained in the terms
thereof. Further, if the Group fails to complete any of the required
disposals within the agreed timeframes for such disposals, under the
terms of the State Aid approval, a divestiture trustee may be empowered
to conduct the disposals, with the mandate to complete the disposal at no
minimum price.
Furthermore, if the Group is unable to comply with the terms of the State
Aid approval, it could constitute a misuse of aid. In circumstances where
the European Commission doubts that the Group is complying with the
terms of the State Aid approval, it may open a formal investigation. At the
conclusion of any such investigation, if the European Commission
decided that there had been misuse of aid, it could issue a decision
requiring HM Treasury to recover the misused aid, which could have a
material adverse impact on the Group.
In implementing the State Aid restructuring plan, the Group has lost, and
will continue to lose, existing customers, deposits and other assets (both
directly through the sale and potentially through the impact on the rest of
the Group’s business arising from implementing the State Aid
restructuring plan) and the potential for realising additional associated
revenues and margins that it otherwise might have achieved in the
absence of such disposals. Further, the loss of such revenues and
related income may extend the time period over which the Group may
pay any amounts owed to HM Treasury under the APS or otherwise. The
implementation of the State Aid restructuring plan may also result in
disruption to the retained business and give rise to significant strain on
management, employee, operational and financial resources, impacting
customers and employees and giving rise to separation costs which could
be substantial.
The implementation of the State Aid restructuring plan may result in the
emergence of one or more new viable competitors or a material
strengthening of one or more of the Group’s existing competitors in the
Group’s markets. The effect of this on the Group’s future competitive
position, revenues and margins is uncertain and there could be an
adverse effect on the Group’s operations and financial condition and its
business generally.
The occurrence of any of the risks described above could have a material
adverse effect on the Group’s business, results of operations, financial
condition, capital position and competitive position.
Additional information continued