Lloyds Bank record cash call offers big discount

By JANE WARDELL

posted: 1 DAY 7 HOURS AGO

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LONDON -Lloyds Banking Group PLC launched Britain's biggest ever rights issue on Tuesday, calling on long-suffering shareholders to answer a 13.5 billion pound ($22.3 billion) cash call.

Lloyds is offering shareholders a huge discount for taking part as it seeks to raise funds to avoid the constraints of a state-sponsored asset protection program — but analysts advised investors to be cautious given the reliance of the bank on the recovery of the still stuttering British economy.

Lloyds is holding out a carrot by offering shareholders 1.34 new shares for each existing share at 37 pence — less than half Lloyds' closing price Monday evening. The stock was up 2.4 percent at 93.69 pence on Tuesday.

Shareholders will vote on the plan on Thursday and, if it is approved, they will have until early December to decide whether to take up their rights.

Those who do not take part will have their shareholding significantly diluted, as the 36.5 billion shares being created will make up 57.3 percent of Lloyds' enlarged share capital.

The government, which has a 43 percent stake in the bank, has already said it will back the deal, contributing 5.7 billion pounds of the total.

Lloyds needs the money to repair its balance sheet after taking over failing bank HBOS PLC and pulling out of the government's Asset Protection Scheme, which would have cost 15.6 billion pounds to insure 260 billion pounds in loans. Joining the program would have also increased the government's stake to a majority 62 percent.

News of the cash call comes a day after Lloyds agreed a deal with its bondholders to raise another 8.8 billion pounds, and announced plans to cut another 800 jobs.

But analysts said investors — who have already been asked twice before for funds — should think carefully about taking part in the fund raising, which surpasses HSBC Group PLC's 12.5 billion pound cash call in March.

Richard Hunter, head of U.K. equities at Hargreaves Lansdown Stockbrokers, noted that Lloyds is nowhere near as geographically diversified as many of its rivals, leaving it dependent on the struggling British economy.

"This very factor could lead to the company being more exposed to defaulting debts, leading one fund manager to note that the rights issue is more of a rescue operation than an investment opportunity," Hunter said.

Jonathan Jackson, head of equities at Killik & Co. said that the shares "remain a pure play on U.K. economic growth and the ability of management to extract better-than-expected synergies from the HBOS acquisition.

"An additional risk is that banking sector returns may be capped by the regulator," Jackson said.

The Bank of England revealed on Tuesday that it lent HBOS and the Royal Bank of Scotland PLC 61.6 billion pounds ($101.8 billion) in emergency funding to save them from collapse at the height of the financial crisis a year ago.

It was the first time the bank has detailed the level of support it provided to the pair in October and November 2008, when the financial system froze in panic in the wake of the bankruptcy of Lehman Brothers. It added the money was paid back in full by January.

Bank of England Governor Mervyn King told lawmakers that the funding "was to prevent a loss of confidence spreading through the financial system as whole."

RBS will end up being 84 percent owned by the government after it puts risky loans up for insurance under the Asset Protection Scheme.

2009-11-24 13:03:49