Lloyds Banking Group is asking its 2.8m shareholders, the largest investor base of any UK company, to stump up cash for new shares in the bank’s record £13.5bn rights issue.
Investors are being offered 1.34 new shares for every Lloyds share they own at a discounted price of 37p, the state-backed lender announced this week. The capital-raising, which allows the bank to avoid the government’s expensive insurance scheme for “toxic” assets, was approved in a shareholder vote on Thursday. The rights to buy the new shares started trading in the stock market yesterday.
What happens now?
Shareholders have a week or so to decide whether they want to take up the new shares. Lloyds is writing to shareholders with details and provisional allotment letters (PALs), while investors who hold their shares through brokers should receive a
communication from them. The deadline for buying the discounted shares is December 11, but investors may be subject to earlier cut-off dates through brokers.
What are my options?
Shareholders can take up their rights to buy the discounted shares. Private investors with the average holding of 740 shares have a full entitlement to 991 new shares, which will cost £366.67 to take up. But they can choose to buy just some of their allocation.
Or they could sell their rights and receive a cheque for the proceeds. Investors who hold their shares through Lloyds’ nominee accounts or in certificated form can sell for free through the bank.
If investors do nothing, their rights will lapse and will be sold by the bank on their behalf – which should also yield some cash.
Cashless take-up or “tail swallowing” is another option. This involves selling sufficient rights to fund the take-up of some of the new shares, without requiring extra cash. Lloyds is offering free dealing to its nominee account shareholders who take this option.
What should I do?
The conventional view is that investors should buy the new stock to avoid “dilution” – to maintain their stake in the bank, given the 36.5bn shares being created by the rights issue.
Paul Kavanagh, partner of Killik & Co, the broker, says that investors who don’t want to put more cash into Lloyds should opt for tail swallowing to pick up some shares.
However, brokers warn that by backing the fund-raising by the UK’s biggest mortgage lender, investors are betting on economic recovery. Investors not wanting to participate in the issue may be better off selling their rights rather than letting them lapse.
