Rescue will land RBS with £600m annual interest bill

Royal Bank of Scotland will have to pay the Treasury £600 million a year just to service its £5 billion of preference shares it emerged today.

The Government has demanded that the three banks it is rescuing pay a massive 12% coupon on their preference shares. So for a merged Lloyds HBOS the annual interest bill will be £480 million.

Preference shares rank above ordinary shares both in terms of dividend payments and also priority in the event of a winding-up. But the Government has gone one stage further than that and told the banks that they cannot pay ordinary dividends until they have redeemed all its preference shares.

In other words, existing investors in the three banks can expect no pay-outs for years to come. That gave many funds no choice but to dump their holdings.

In the meantime, the Government has said it will finance its £37 billion injection from the gilts market. Talks about the scale and timing of such fundraising began this afternoon and will be announced tomorrow. Gilt prices fell today, pushing the yield on a 10-year note to 4.66%.

The three banks rescued today announced different dividend policies. HBOS did not mention them, RBS will not pay any while the preference shares are still in issue while Lloyds said it will not pay cash dividends until the latter are redeemed.