Lloyds Seeks GBP21 Billion To Avoid APS; Light Asset Sale
03.11.09, 12:47 Uhr |
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LONDON -(Dow Jones)- Lloyds Banking Group PLC (LYG) on Tuesday unveiled a long-awaited plan to raise GBP21 billion in capital to escape the U.K. government's expensive asset protection scheme, a move that will also help the bank remain largely the same in overall structure. (photo: Lloyds)
The bank, 43%-government owned, said it will dispose of more than 600 branches over four years, representing a 4.6% current account market share and about 19% of its mortgage balances under European Union competition remedies.
The EU demands over Lloyds were softer than over U.K. peer Royal Bank of Scotland Group PLC (RBS), which announced a massive disposal program of its insurance arm and branch network earlier Tuesday.
"The greatest 'triumph' of this entire episode for Lloyds is probably the capitulation by Brussels, possibly assisted by the U.K. government, apparently choosing to give Lloyds special treatment in comparison to all other state-aided banks," ExaneBNP Paribas said in a note.
Lloyds and RBS were among many European banks that needed government bailout amid one of the worst financial crisis on record.
In exchange for the help they received, they now have to fulfill requirements from the European Commission, which wants to make sure aided banks aren't in competitive advantage to those that stayed independent.
RBS will be 84% owned by the government after joining the insurance program that Lloyds is avoiding.
Instead, Lloyds said it will seek to raise GBP13.5 billion in a rights issue and GBP7.5 billion in an exchange of securities, including contingent-capital instruments, which are debt that covert to equity during times of financial distress.
The U.K. government has agreed to subscribe to enough rights shares to keep its stake at current levels, Lloyds said, adding that its Core Tier 1 capital ratio will rise to 8.6% from 6.3%.
"These proposals provide a significantly more attractive, market-based alternative to participating in [the asset protection scheme] and offer superior economic value to shareholders," Chairman Winfried Bischoff said.
"We believe that this represents a significant step toward meeting our, and the government’s, objective that the group operates as a wholly privately owned, self-supporting commercial enterprise," he added.
The bank said the issue price of the rights offer will be set before a general meeting with shareholders, to be held Nov. 26
At 1033 GMT, shares of Lloyds were up 1 pence, or 1.6%, at 86 pence.
The bank said under the securities exchange offer, holders can exchange their securities for bonds that will be converted into shares if the company's core Tier 1 ratio falls to below 5%.
Lloyds' capital-raising announcement came after weeks of speculation on whether it could avoid participating in the expensive insurance program launched by the government earlier this year to help banks get out of the financial crisis.
If all efforts disclosed Tuesday are successful, it said, it would be able to avoid the APS plan altogether.
Analysts have said that much of Lloyds' current woes come from its purchase in January of ailing mortgage lender HBOS PLC, which was pushed by the government itself. HBOS' bad loans already cost Lloyds around GBP10 billion in impairment charges in the first half of the year.
The APS program was drawn up to ring-fence banks' bad assets, such as those from HBOS, and Lloyds agreed to join in exchange for a fee and a larger government stake.
In Lloyds' case, the government would have insured roughly GBP260 billion in risky assets for a fee of GBP15.6 billion, which would be paid in the form of nonvoting shares. The bank would also have been responsible for a first loss of GBP25 billion.
Since it agreed on the insurance in March, however, market conditions have improved, and in September the bank said it was considering alternatives to the expensive scheme.
Lloyds said it will pay the Treasury a fee of GBP2.5 billion for the implicit APS support it has received until now. It has also agreed to reaffirm lending commitments with the government to March 2011.
Lloyds also said Tuesday that continued to deliver a good revenue performance in the third quarter on the lines of those delivered in the first half of the year.
It said impairment run-rate has slowed, signaling that charges peaked in the first half of the year.
The bank reiterated, though, that "we continue to expect the group to report a loss before tax for 2009, excluding the impact of the GBP11.2 billion credit relating to negative goodwill."
Under the EU remedies, Lloyds is selling the Cheltenham & Gloucester branch network, Lloyds TSB Scotland and Internet banking unit Intelligent Finance.
It will sell GBP180 billion in noncore assets by 2014, and will also be forbidden from making certain acquisitions in the next three to four years.
The EU also set a ban on coupon payments on certain securities for two years. The ban doesn't apply to the contingent capital instruments Lloyds will issue.
The bank called the disposals immaterial. Analysts said the retail businesses to be sold generated GBP500 million in pretax earnings in 2008.
Merrill Lynch and UBS (UBS) are acting as joint sponsors, financial advisers, global co-ordinators and bookrunners of Lloyds' offer.
The rights issue is fully underwritten by Merrill Lynch, UBS, Citi, Goldman Sachs (GS), HSBC Bank, J.P. Morgan Cazenove "and others," the bank said.
The EU demands over Lloyds were softer than over U.K. peer Royal Bank of Scotland Group PLC (RBS), which announced a massive disposal program of its insurance arm and branch network earlier Tuesday.
"The greatest 'triumph' of this entire episode for Lloyds is probably the capitulation by Brussels, possibly assisted by the U.K. government, apparently choosing to give Lloyds special treatment in comparison to all other state-aided banks," ExaneBNP Paribas said in a note.
Lloyds and RBS were among many European banks that needed government bailout amid one of the worst financial crisis on record.
In exchange for the help they received, they now have to fulfill requirements from the European Commission, which wants to make sure aided banks aren't in competitive advantage to those that stayed independent.
RBS will be 84% owned by the government after joining the insurance program that Lloyds is avoiding.
Instead, Lloyds said it will seek to raise GBP13.5 billion in a rights issue and GBP7.5 billion in an exchange of securities, including contingent-capital instruments, which are debt that covert to equity during times of financial distress.
The U.K. government has agreed to subscribe to enough rights shares to keep its stake at current levels, Lloyds said, adding that its Core Tier 1 capital ratio will rise to 8.6% from 6.3%.
"These proposals provide a significantly more attractive, market-based alternative to participating in [the asset protection scheme] and offer superior economic value to shareholders," Chairman Winfried Bischoff said.
"We believe that this represents a significant step toward meeting our, and the government’s, objective that the group operates as a wholly privately owned, self-supporting commercial enterprise," he added.
The bank said the issue price of the rights offer will be set before a general meeting with shareholders, to be held Nov. 26
At 1033 GMT, shares of Lloyds were up 1 pence, or 1.6%, at 86 pence.
The bank said under the securities exchange offer, holders can exchange their securities for bonds that will be converted into shares if the company's core Tier 1 ratio falls to below 5%.
Lloyds' capital-raising announcement came after weeks of speculation on whether it could avoid participating in the expensive insurance program launched by the government earlier this year to help banks get out of the financial crisis.
If all efforts disclosed Tuesday are successful, it said, it would be able to avoid the APS plan altogether.
Analysts have said that much of Lloyds' current woes come from its purchase in January of ailing mortgage lender HBOS PLC, which was pushed by the government itself. HBOS' bad loans already cost Lloyds around GBP10 billion in impairment charges in the first half of the year.
The APS program was drawn up to ring-fence banks' bad assets, such as those from HBOS, and Lloyds agreed to join in exchange for a fee and a larger government stake.
In Lloyds' case, the government would have insured roughly GBP260 billion in risky assets for a fee of GBP15.6 billion, which would be paid in the form of nonvoting shares. The bank would also have been responsible for a first loss of GBP25 billion.
Since it agreed on the insurance in March, however, market conditions have improved, and in September the bank said it was considering alternatives to the expensive scheme.
Lloyds said it will pay the Treasury a fee of GBP2.5 billion for the implicit APS support it has received until now. It has also agreed to reaffirm lending commitments with the government to March 2011.
Lloyds also said Tuesday that continued to deliver a good revenue performance in the third quarter on the lines of those delivered in the first half of the year.
It said impairment run-rate has slowed, signaling that charges peaked in the first half of the year.
The bank reiterated, though, that "we continue to expect the group to report a loss before tax for 2009, excluding the impact of the GBP11.2 billion credit relating to negative goodwill."
Under the EU remedies, Lloyds is selling the Cheltenham & Gloucester branch network, Lloyds TSB Scotland and Internet banking unit Intelligent Finance.
It will sell GBP180 billion in noncore assets by 2014, and will also be forbidden from making certain acquisitions in the next three to four years.
The EU also set a ban on coupon payments on certain securities for two years. The ban doesn't apply to the contingent capital instruments Lloyds will issue.
The bank called the disposals immaterial. Analysts said the retail businesses to be sold generated GBP500 million in pretax earnings in 2008.
Merrill Lynch and UBS (UBS) are acting as joint sponsors, financial advisers, global co-ordinators and bookrunners of Lloyds' offer.
The rights issue is fully underwritten by Merrill Lynch, UBS, Citi, Goldman Sachs (GS), HSBC Bank, J.P. Morgan Cazenove "and others," the bank said.
DJG/dok
