September 23, 2020

Barclays faces conflict question over £200m Mitie share sale

June 25, 2020

Barclays is facing questions over a possible conflict of interest by being paid to help Mitie, the outsourcer, raise £200m to fund the purchase of a company that the bank partly owns.

Sky News has learnt that HSBC withdrew from the group of banks arranging Mitie's rights issue following internal concerns that were raised because it is also a shareholder in Interserve, a rival government and private sector contractor.

Mitie confirmed on Thursday that it was buying Interserve's support services arm in a deal - revealed by Sky News - that will create an outsourcing behemoth employing about 80,000 people in the UK.

Barclays and HSBC both became shareholders in Interserve last year following a debt-for-equity swap at the company, which briefly crashed into administration.

The two British-based banks are understood to have both held talks with Mitie - to which they are also lenders - about participating in its rights issue syndicate.

However, HSBC subsequently informed Mitie that it would not assist with the equity raising because of the apparent conflict of interest.

Barclays is said to have decided that its dual role working on Mitie's rights issue and as an Interserve shareholder presented no such conflict.

"They are earning fees by raising money to help fund the purchase of something they own themselves," a person familiar with HSBC's stance said.

"It is interesting that one bank decided there could be a conflict and another decided the opposite."

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While there is no suggestion of any wrongdoing by Barclays, its involvement on both sides of the transaction may attract scrutiny because of the attention being paid by City watchdogs to such issues during the coronavirus pandemic.

The Financial Conduct Authority (FCA) is already examining the behaviour of lenders to companies which then use the same banks to help raise equity from public market investors.

Mitie announced alongside the Interserve deal and rights issue that it had also secured an extension of its £250m revolving credit facility to the end of 2022.

Santander, which is among the providers of that facility, was also named as an underwriter on the equity deal.

Since the COVID-19 crisis erupted, there have been dozens of examples of banks which are lenders - but not corporate brokers - to listed companies being named on announcements about fundraisings worth, in aggregate, tens of billions of pounds.

Sky News reported last month that Barclays and HSBC agreed to a temporary waiver of the travel company Dart Group's lending covenants before being added to the syndicate of investment banks which worked on the emergency placing.

In April, two senior FCA executives wrote to bank bosses to warn them that it would examine behaviour which appeared to tie lending relationships to other services.

Megan Butler and Jonathan Davidson, the FCA's executive directors of supervision, said in the letter: "We have heard reports that banks may have used their lending relationship to exert pressure on corporate clients to secure roles on equity mandates that the issuer would not otherwise appoint them to.

"In some cases, these roles may be 'in name only', with few or no additional services being provided in exchange for a share of the fee pool."

"We will be separately contacting your firm directly to speak to the relevant senior manager if you have had both a lending relationship and equity role with any of the issuers who have recently raised significant equity capital," the regulator said.

"We want to understand how you ensured your clients were treated fairly, and inside information was handled appropriately."

They warned that they would be "looking into this further, but want any practice of this nature to cease immediately".

Numis Securities, the independent investment bank, complained at the time to the FCA about lending banks muscling in on emergency equity-raises on the basis that it was unfairly shrinking the fee pool for corporate brokers.

Many billions of pounds have been raised by listed companies during the coronavirus pandemic as they seek to fortify their balance sheets.

Three examples - easyJet, the caterer Compass Group and Whitbread, the hotelier - have secured £3.5bn between them in the form of rights issues and placings.

Others have included estate agent Foxtons, online fashion retailer Asos and the high street retailer WHSmith.

The FCA's probe has become a talking point in the City because it has triggered echoes of the banking misconduct which swept through the industry during and after the 2008 financial crisis.

The so-called "bundling" of services - where banks make the provision of one product, such as a credit facility, dependent upon the acceptance of others through the signing of restrictive clauses - was banned by the FCA in 2017.

A Santander spokesperson said: "We have not made the provision of credit conditional on a role in any equity raising and have confidence that the service we provide our customers meets the standards expected of us."

Barclays and HSBC declined to comment.

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