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Lloyds Banking Group moved a step closer to a huge £25 billion fundraising exercise today, confirming it's in advanced talks about such a move with its biggest shareholder — the UK Government.
The bank, which now includes the stricken outfit formerly known as HBOS following a takeover at the height of the financial crisis, has been desperate to avoid signing up to the Government Asset Protection Scheme.
That scheme would allow it to park £260 billion of its worst assets — corporate loans and buy-to-let mortgages — with the Government to insure it against future losses.
It would have to pay £15 billion plus a £1 billion a year coupon payment in return for using GAPS, an amount it fears would hinder growth.
Instead it would prefer to do a fundraising exercise among present shareholders but has struggled to persuade the authorities — including Chancellor Alistair Darling — that this will be sufficient to ensure its solidity.
Today, Lloyds said that the Treasury and the Financial Services Authority have given it the go-ahead to investigate whether there is sufficient appetite for the rights issue.
It would look to raise up to £15 billion from the sale of new shares, and is looking at converting existing debt into equity to raise another £10 billion.
UBS and Bank of America Merrill Lynch have been appointed to underwrite the rights issue and will immediately begin testing the water. If they can convince the Government — which has 43% of the shares — that a fundraiser is viable, it could go ahead within weeks.
Not everyone welcomed the news. Capital Economics said in a note that “it could further reduce the Government's ability to get UK banks to lend enough to support the economic recovery”.
It also emerged today that even if Lloyds does manage to avoid GAPS, it would have to pay a fee to the Government running into hundreds of millions of pounds for the implicit guarantee it has been operating under for months.
Lloyds has 2.8 million small shareholders who would also be given the chance to buy more shares in a rights issue, though the final say will depend on the attitude of major City institutions.
Since the end of March, Lloyds shares have surged 65% as the worst of the crisis passed and lingering fears that it could go bust faded. Today the shares enjoyed another lift, rising 4.7p to 84.7p.
Lloyds is also in talks with the European Commission over how to address the competition issues related to its state support.
It is assumed, not denied by Lloyds, that this will see it sell off mortgage group Cheltenham & Gloucester.
