Rights Issue A Risk Too Far For Lloyds – US-FOREX.US
Lloyds Banking Group is facing the choice between the prudent approach that it has been long been known for and a big gamble. Should it stay within the government’s asset protection program or attempt to make a bid for independence?The bank, currently 43% in the hands of the British government, is reportedly mulling a 15 billion pound rights issue, as a way of scaling back its involvement in the government program, which limits its potential losses from toxic assets. But the program comes at a price: as much as 16 billion pounds in insurance payments.The instigation for Lloyds to reconsider its options appears to be the prospects of a new chairman: Win Bischoff, who takes over as chairman in mid September, is pushing the bank towards this option, according to reports in Monday’s London Times. A spokeswoman for Lloyds declined to comment on this report, but instead insisted that the firm was “working with the Treasury” to finalize the terms of its intended participation in the scheme. “We expect to conclude those discussions and agree terms that are in the best interests of our shareholders,” she said.While participation in the toxic asset protection will protect the bank from further severe declines in the value of its assets, it is not without its downside. Aside from the pricey premium payments, the bank would also have to sell some of its branch network to alleviate concerns of the European Competition Commission and its tough head, “Nickle” Neelie Kroes, that banks receiving state aid could gain an unfair advantage over banks that do not.However, analysts warn that Lloyds may want to think twice before attempting anything on its own, despite the confidence it recently expressed as it reported its second quarter results. Shareholders would end up with “more dilution and less protection,” warns Sandy Chen of Panmure Gordon. It’s a view shared by Leigh Goodwin of Fox Pitt Kelton, who believes the bank has three options facing it: one is rejecting the insurance scheme altogether and going for a pure rights issue, which would be risky, but would allow the government to maintain its stake in the bank. Another is a reduced participation in the insurance program, backed by a rights issue, which would also struggle to get takers, or would have to take place at such a deep discount that it would be even more dilutive to existing shareholders than the existing government shares. All in all, says Goodwin, shareholders are best off with the final option-the government’s asset protection program-which is actually “quite generous” considering the circumstances. “Lloyds without asset protection is not an attractive stock,” he says.
Goodwin believes that despite the firm’s recent attempt to put a positive spin on its quarterly results, confidence in management’s ability to turn the firm around remains shaky. Shares of Lloyds Banking Group
were down 4.6%, at 97.28 pence , in early afternoon trading in London. Last week, Lloyds Banking Group reported a 6.8 billion loss for the first six months of 2009, after impairments worth 22.8 billion. Most of the troubled assets belonged to HBOS, the mortgage lender it acquired in a controversial deal. The firm had attempted to gloss over its problems somewhat, saying it had been “prudent” in making the markdowns. Nevertheless, there are likely more troubles to come, and Fox Pitt Kelton’s Goodwin believes the bank could start claiming on its insurance policy as early as in the first half of 2010.
In March, Lloyds said it would be placing 260 billion pounds worth of assets into the protection scheme but has since been firming up the exact terms of the deal.