Lloyds Banking Group chief executive Eric Daniels must keep many plates spinning to keep alive his hope of launching a record rights issue, and a lack of political or regulatory support threatens to bring them all crashing down.
The partly-nationalised bank needs to raise about 25 billion pounds ($40 billion) to satisfy regulators it’s strong enough if it is to opt out of a state asset protection scheme (APS), according to bankers and industry sources.
And that is a tall order, even if investors are showing a good appetite for cashcalls, leaving the most likely outcome as a revision of the terms to the APS, analysts reckon.
Daniels is pushing for a full exit from the scheme, which he regards as costly and a better deal for taxpayers than for his shareholders.
But if the bank opts out it needs to show Britain’s Financial Services Authority its capital position is “bullet-proof”, industry sources said.
“Lloyds obviously wants to come out of the APS altogether,” said a top 15 investor in Lloyds, who asked not to be named. “The stress tests are so aggressive that’s looking like an expensive option because … they have to raise more capital than they would have liked.”
That’s because under APS Lloyds would be passing onto the state the risk on 260 billion pounds of toxic assets and getting a huge reduction in its risk-weighted assets. So without the APS it would need to raise enough capital to withstand potential losses on a bigger balance sheet.
Many seat at table
Adding to the complexity of the situation is that not just Lloyds and the FSA are sitting at the negotiating table.
As a shareholder Britain’s government needs to decide whether to support a cashcall and pump billions more into the bank, while the European Commission as competition regulator needs to agree on the nature and extent of whatever state aid Lloyds is going to end up with.
“There are a lot of different views on the merits of each part of the plan,” said David Williams, analyst at Fox-Pitt, Kelton.
“On the FSA’s mind is financial stability and whether Lloyds could risk stability; the government is worried about what’s the burden on the public purse; and the European Commission is thinking about competition. It’s a horrible one to get everyone to buy into,” he said.
Lloyds’ hopes hinge on it raising about 15 billion pounds from a rights issue and 10 billion pounds from asset sales and restructuring its debt.
The rights issue would be the world’s biggest ever, surpassing a 12.9 billion pound cashcall made by HSBC in March. It would represent more than half of Lloyds’ current market value.
To succeed it would need to offer shares at a discount of close to 40 percent, several bankers said. Recent bumper rights issues by BNP Paribas and Societe Generale were set at under 30 percent.
UKFI, the body holding Britain’s state interests in its rescued banks, would be asked for about 6.5 billion pounds to keep its stake at 43 percent.
The decision rests with UK finance minister Alistair Darling.
“It’s a political decision. And how does a government claiming the economy is recovering turn around and say we’ve got to put another several billion pounds into a bank?” said Simon Maughan, analyst at MF Global.
The government could opt not to participate in a rights issue, which would dilute its stake to about 25 percent but might attract new investors in to take up the slack if the discount is about 35 percent, he said.
Several bankers and investors said Whitehall support is key to underpin an offer, however. “It is a must,” said one fund manager.
The Treasury would like to maintain its stake but has not made its final decision, people familiar with the matter said. Treasury coffers could also get about 1 billion pounds from Lloyds to pay for the insurance provided by the APS since March.
Where Lloyds gets its other 10 billion pounds from could be more of an issue for UK and European regulators.
Lloyds could offload its insurance operations, notably Scottish Widows and Clerical Medical, or its 60 percent stake in wealth manager St. James’s Place, but may struggle to get much of a capital boost from offloading those assets at a discount to embedded value.
The sale of 164-branch Cheltenham & Gloucester may not go far enough to raise capital or appease Brussels. Which means it might have to consider a more radical option — such as selling Bank of Scotland, said MF Global’s Maughan.
