RBS launches biggest rights issue at £12bn

Chairman Sir Tom McKillop virtually apologised to investors as he said that the board had chosen to raise £12 billion "whilst acknowledging with regret the demands this would place on share-holders".

RBS will write down £5.9 billion of its exposure to the credit markets, which it hopes will cover the whole of 2008.

The rights issue is heavily discounted, with the new shares being sold for just 200p compared with last night's closing share price of 372½p.

Today the shares, which have been highly volatile since talk of the rights issue first surfaced last week, fell 9½p to 363p.

Sir Fred Goodwin, who many in the City say is battling for his future as chief executive, said today's writedowns offered "a material stepping up of level of cover against future losses".

Goodwin not only led last year's £57 billion takeover of Dutch bank ABN Amro as the credit crunch struck but had consistently denied the need to raise fresh capital.

But McKillop said: "The board has full confidence that the executive team will be able to lead RBS through the current challenging conditions."

The bank also made it very clear how vital today's cash-raising is.

It said the decision came "in the light of developments during March, including the severe and increasing deterioration in credit market conditions, the worsening economic outlook and the increased likelihood that credit markets would remain difficult for some time".

That will put pressure on other banks to come clean on their writedowns and raise new capital.

Bank of England Governor Mervyn King said as he launched yesterday's £50 billion liquidity package for Britain's banks: "I am pleased that banks have recognised the need to raise capital."

Analysts reckon most of the High Street banks will need to bolster their balance sheets quickly. JPMorgan estimates HBOS needs £13 billion, Barclays £ 8 billion and Lloyds TSB £4 billion.

Today's rights issue is on the basis of 11 new shares for every 18 held and is fully underwritten by Goldman Sachs, Merrill Lynch and UBS.

RBS said it could raise a further £4 billion of capital by selling off its insurance business which includes Direct Line and Churchill. The £3.5 billion sale of rolling stock leasor Angel Trains is also likely soon.

It also warned that this year's dividend will be cut with the first-half dividend paid in shares, not cash. That will help it continue to conserve cash.