Lloyds Banking Group has finally announced the details of its £13.5bn rights issue – it's asking shareholders, including its 2.8m private investors, to buy 1.34 new shares for each one already owned. Priced at 37p, the issue represents a hefty discount to the existing share price, and a 39 per cent discount to the theoretical ex-rights price (or the price that the shares should move towards following the issue).
Raising capital in this way does make sense. Along with funds being raised from a debt-for-equity swap, it will allow Lloyds to avoid the government's asset protection scheme, which offers state insurance against default on lenders' most toxic assets. But such cover comes at an unacceptably high price; Lloyds will now avoid the scheme's £15.7bn fee and prevent the government's stake from rising to a smothering 60 per cent. Instead, it will remain at 43 per cent, while the fundraising proceeds will bulk up Lloyds' cushion against bad debts; its core tier one capital ratio will rise from 6.3 per cent to a solid-looking 8.6 per cent.
The debt-for-equity element has gone well, too. Demand for an exchange of bonds for a new type of contingent convertible ('CoCo') security, which converts into shares if Lloyds' capital reserves fall too far, has been strong. It received £12.5bn of offers from investors for an £8.78bn exchange.
But while the bank's shares have risen 7 per cent since start of the week, to 94p, there's seems little to celebrate. It's worth remembering that Lloyds needs the cash because of a bad debt crisis, primarily at HBOS, which decimated its existing resources. Given that bad debts usually peak at the end of recession, investors can expect more bad debt pain ahead. And, after being forced to hive-off various operations by EU competition regulators, Lloyds is also barred from paying dividends for two years. Even that CoCo demand seems a tad false. EU regulators had barred Lloyds from paying coupons while it was in receipt of state aid, so in reality it had little choice but to herd investors into new instruments.
