Lloyds are looking to avoid the embrace of government by going to existing shareholders to raise capital and sidestep the draconian break-up solution foisted upon RBS by Neelie Kroes. According to Bloomberg, this is the largest rights issue ever for a British company and equates to $34 billion.
All of this must be excruciating for Lloyds shareholders, as Lloyds was not a reckless lender during the bubble years. It was HBOS which nearly went to the wall and was subsequently foisted onto Lloyds. At the time (late September 2008), I certainly thought the deal was in the best interest of all concerned given how little Lloyds was paying for HBOS:
The fact that government were so involved in the negotiations makes clear how important it was that this deal get done. It appears to have been the best outcome for all parties concerned: HBOS, Lloyds and Labour. The British Government has been pilloried for having squandered the good times and leading the UK into a major downturn with no room for fiscal stimulus. Both Gordon Brown and Alistair Darling should be worried about getting the sack. The last thing either they or the Labour Party needed was a failure of an institution like HBOS. HBOS was too big to fail.
The HBOS crisis was a perfect example of how liquidity concerns become intertwined with solvency issues in a time of panic. With the HBOS crisis now at an end, one wonders whether RBS will come under attack next, or whether we can breathe a sigh of relief until the next round of writedowns or share price losses. We will have to wait and see.
What Lloyds are looking to dodge is the government’s Asset Protection Scheme, which Bloomberg estimates will cost the bank 15.6 billion pounds in fees and easily raise the government’s stake to a majority at 62 percent.
Below are the defining paragraphs of the scheme:
1.1 Under the Scheme, in return for a fee, the Treasury will provide to each participating institution protection against future credit losses on one or more portfolios of defined assets to the extent that credit losses exceed a “first loss” amount to be borne by the institution. It is intended that the Scheme will target those asset classes most affected by current economic conditions.
1.2 The Treasury protection will cover the major part but not all of the credit losses which exceed this “first loss” amount. Each participating institution will be required to retain a further residual exposure, which is expected to be in the region of 10 per cent. of the credit losses which exceed the “first loss” amount. This residual exposure will provide an appropriate incentive for participating institutions to endeavour to keep losses to a minimum.
1.3 The Treasury currently expects that the fee will usually be satisfied by the issue of capital instruments of the participating institution. These instruments are not expected to include ordinary shares, but will include a range of alternative capital instruments. The Treasury will be open to consider other forms of fee, including cash.
Nevertheless, Lloyds are being forced to flog off assets , effectively deleverage, in order to escape the APS. Insight Investment management was sold to Bank of New York Mellon for 235 million pounds on Monday. The Intelligent Finance business, Cheltenham & Gloucester accounts and mortgages, and a number of Lloyds TSB branches in England & Wales will be gone within four years. The TSB brand is also history. No mention of plans concerning the Halifax or Bank of Scotland brand has been made.
It is unclear what kind of reception such a large rights issue will receive. Lloyds is down almost 2% in heavy trading so far today.
Sale announcement of Insight by Lloyds – Lloyds TSB website