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Lloyds Banking Group shares could be sold for as little as 15p each in its £13.5 billion rights issue it was revealed today.
That is a huge discount to today's share price — down 1.6p at 83.4p —and potentially anything up to a 42% discount to the theoretical rights price when the actual value is set in three weeks' time.
The issue and a £7.5 billion bond swap means Lloyds will escape the Government's insurance scheme (GAPS) designed to protect its worst assets, meaning the taxpayer stake will not increase above 43%.
The bank will pay £500 million in underwriting fees. Most of this will go to six investment banks, but the Treasury has also demanded its share at more than £100 million.
The rights issue will cost the taxpayer another £5.7 billion on top of the £14.5 billion already injected into the ill-fated merger of Lloyds and HBOS.
It is the biggest UK rights issue, topping the £12.5 billion raised by rival HSBC this year.
Lloyds chairman Sir Win Bischoff said today's deal “provides a significantly more attractive, market-based alternative to participating in the asset protection scheme and offers superior economic value to shareholders”.
He also gave a ringing endorsement to chief executive Eric Daniels, saying he was the “right man and the right team to execute turnaround”.
Lloyds also said it will sell 600 branches, including all 164 Cheltenham and Gloucester branches, the whole of Lloyds TSB in Scotland, which has 185 branches, and 250 Lloyds TSB branches in England and Wales, the TSB brand name and its online business Intelligent Finance within four years to satisfy EU rules.
Through the branch disposals, the bank will lose around a fifth of its entire mortgage book.
Lloyds has also agreed to sell off a pool of assets, mainly commercial property loans worth £181 billion.
The bank is offering holders of £18 billion of its bonds the chance to switch them into new, enhanced capital notes, which pay better interest but rank as key Core Tier One capital when it comes to the strength of the bank's balance sheet. Daniels said investors' reaction to Lloyds's decision to avoid GAPS was “almost universally positive”. He also said bad debts appeared to have peaked in its core businesses.
