Lloyds confirms it is weighing up rights issue

29 October 2009 | By Natalie Holt

Lloyds Banking Group has confirmed it is considering a rights issue as part of a substantial capital raising exercise to free the bank from taking part in the Government Asset Protection Scheme.

A statement from Lloyds Group acknowleges the recent media speculation surrounding whether or not the bank will particiapte in the scheme.

The bank had planned to place £260bn of toxic assets into the scheme to obtain a government guarantee on the assets should the loans sour in the future.

In return for this government guarantee, Lloyds Group would have had to pay over £15bn over a five-year period to access the scheme.

The bank now says that it is advanced discussions with the Treasury, UK Financial Investments (the body set up to manage the government’s stake in banks), and the Financial Services Authority to thrash out viable alternatives to using the scheme.

The Lloyds Group statement says: “Lloyds believes that any alternative proposals to GAPS would be likely to include a substantial capital raising of core tier 1 and contingent core
tier 1 capital to increase the group’s capital ratios to an appropriate level of strength and flexibility, and would provide a strong capital base for the future stability and success of the group.

“The alternative proposals would also meet the FSA’s requirements for stressed economic conditions.”

Lloyds Group is considering a combination of capital raising exercises.

Under discussion is a rights issue, reportedly between £11bn and £15bn, and a debt-equity swap thought to be worth up to £10bn.

The bank says these proposed capital raisings are expected to be fully underwritten and will be subject to shareholder approval.

If Lloyds Group decides not to use the GAPS it will have to pay the Treasury an undisclosed fee to reflect the implicit government guarantee the bank has benefited from since its original announcement that it planned to use the scheme back in March.

The statement says: “There can be no certainty at this stage that any alternative to GAPS will proceed.

“All options remain open.”

Lloyds Group has also confirmed that it is in advanced discussions with the European Commission over restructuring plans to comply with receipt of state aid.

The bank says that the final restructuring plan, thought to include getting rid of certain assets such as branch networks and surplus brands, will not have a material impact on the group.

The Lloyds Group statement adds: “The group continues to trade satisfactorily.

“It has delivered a robust trading performance over the last few months and continues to deliver in line with recent guidance.”