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Lloyds Banking Group and the UK government could reach an agreement next week on whether to allow the bank to exit the government’s asset protection scheme (APS) via a rights issue next week, a Treasury insider told dealReporter.
An outcome will not be achieved this week as some media reports have speculated, according to the insider, a source familiar with the situation and a Lloyds insider. However, while the situation remains in flux, it is hoped a decision can be made by the end of next week, which would be the cut-off point for Lloyds being able to launch and close the cash call this side of Christmas, according to the source familiar with the situation.
The timing would depend on how Lloyds opts to structure the deal, whether wholly as a straight rights issue or use another structure such as a placing and open offer as it did earlier this year. An open offer necessitates a minimum of 15 business days, while the FSA earlier this year shortened the minimum subscription period of a rights issue from 21 calendar days to 10 business days. If shareholder approval is needed, an extraordinary general meeting also has to be convened, which requires a minimum notice period of 14 days under the Companies Act 2006.
Lloyds is reported to be pondering an equity raising of around GBP 15bn to get out of the APS, as well as raising another GBP 10bn through other measures to strengthen its capital base sufficiently to bypass the APS. One media report had suggested that a rights issue might be announced this week. However, first Lloyds needs the regulatory green-light.
As both regulator and shareholder, the Treasury is the key player. At the moment, it is considering what terms to demand for the taxpayer in return for letting Lloyds out of the APS. The Treasury insider said a “big fee” would be needed, in the billions of pounds, although the exact amount has yet to be defined. In addition, Lloyds will need to make significant lending commitments, he said. No decision has yet been made by Chancellor Alistair Darling, he said.
The source familiar with the situation said: “There’s no plan B as yet. Both sides are working diligently away on the APS.” These discussions between the bank and the government will not conclude this week, the Treasury and the Lloyds insiders said. However, an agreement is to be expected “reasonably soon,” the Treasury insider said, hopefully next week although the situation remains “up in the air.”
The source familiar with the situation warned that a rights issue would need to be launched by the end of next week to successfully be completed by the end of the year. “It needs to be decided next week as it would need to be closed by mid-December,” he said. As yet though, no decision has been made by the Lloyds Banking Group board on whether to press ahead with a rights issue, he said. In the meantime, the source familiar with the situation said banks are lining up to take a slice of the underwriting if Lloyds goes ahead. He said that alongside lead underwriters Bank of America Merrill Lynch and UBS, other banks looking for a role are Citi, HSBC, Goldman Sachs and JP Morgan Chase. He added: “I’m not sure they’ve started any sub-underwriting discussions yet, but I’m sure they would have talked to shareholders by now.”
The Treasury insider said Chancellor Alistair Darling has not yet made a decision on whether the government would take up its rights and if so how much money to pump into the bank. “It is still under review,” he said. If the government does take up its allocation alongside other Lloyds shareholders, it is understood this would not be considered as state aid by the European Commission. It would only count as state aid if no other investors take part.
The EC will also be key to deciding Lloyds’ fate. Brussels has separately been negotiating a restructuring plan for Lloyds with the UK government for some time. Under EU state aid rules, the more aid the bank receives, the more drastic its restructuring plan has to be. Lloyds’ right issue would allow the bailed-out bank to avoid relying on further state support in the shape of the APS, meaning it would face less restructuring as a result.
It is understood that the EC would view favorably any move that would allow more contribution from the banks and its shareholder and less dependence on the state. A spokesperson for the Commission declined to comment. The Treasury insider said the UK government is “very much” consulting with the EC on Lloyds’ mooted exit from the APS and has been throughout.
Meanwhile, under the UK tripartite system, the Financial Services Authority (FSA) and the Bank of England (BofE) also need to give their go-ahead. The Treasury insider said there is no “joined-up effort” between the Treasury and the other tripartite members on Lloyds. It is understood that the FSA’s main involvement relates to prudential regulation and capital framework in the context of financial stability. It has established a clear capital framework under which - post-stress tests - banks need to hold a minimum 4% core Tier 1 capital. As a result, the UK financial watchdog would be happy with any proposition to raise capital as long as this post-stress test ratio for core Tier 1 is met. A spokesperson for the FSA declined to comment. The BofE was not available for comment
Shares in Lloyds closed up on Thursday 3.61% at 94.80p, giving it a market capitalisation of GBP 25.82bn.
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