IT'S confusing enough for Lloyds Banking Group customers in Scotland working out what's going to happen to their branches.
But consider the miasma of hope, supposition, uncertainty and finger-crossing that will lie at the heart of the bank's proposed £13 billion rights issue – the biggest ever by a UK company – due to be unveiled today.
The plan is this:
Lloyds ho
pes to raise around £13bn through an offer of new shares to existing shareholders. This includes the government, which has a 43 per cent stake in the group. In addition, the bank will issue new bonds which will bring the total fund-raising to more than £20bn.
With the extra cash raised by private shareholders, Lloyds feels it would then be in a position to decline additional government protection. That is, it would not need to go into the Asset Protection Scheme covering some £260bn of toxic loans.
However, it would still have to pay a fee of £2.5bn in recognition of the guarantees provided by the government since March.
That is a big whack of money going from Lloyds to the government and it will grieve many. But had that guarantee not been put in place when it was, what would be the state of Lloyds now?
If all goes to plan, the government would take up its share of the rights (costing £5.6bn), maintaining its share stake at 43 per cent. The bank would then be out of the APS. And, with the business disposals required by Neelie Kroes, the European Competition Commissioner, there would be a better idea of the core businesses that can be developed for the future.
But dare private shareholders risk another penny of equity in a bank that can offer no early solution to its mountain of bad loans, still less promise a resumption of dividend payments? Remember that in 2008 HBOS, a major part of Lloyds Banking Group, made a record loss of almost £11bn.
In the olden days, companies would propose a rights issue of shares (offering existing investors the chance to buy more shares at a discount) on the back of a statement on prospects and, as often as not, a pledge to hold, if not increase, the dividend. That dividend prospect, remember, is crucial for pension funds and insurance companies as well as small private shareholders.
Everything depended on the credibility of the company: its operating structure, the calibre of directors, its market position, the description of current trading, the statement on prospects – and the extent of the discount.
Back in the early months of 1975 when the stock market turned up after a 73 per cent plunge, banks and insurance companies were first in the queue for what proved to be a spate of rights issues.
They were all well subscribed because of the attractive discounts on offer and because investors had a clear idea of the business they were backing.
With Lloyds Banking Group today, it is going to take a real leap of the imagination to grasp what the business will be like two to three years from now – whether it might be back in profit, the composition of those profits, when there might be a dividend and, not least, who is going to be running the group.
A big concern, of course, is the rate at which the group can bear down on those huge bad debts taken on with the fateful acquisition of HBOS. Billions of pounds worth of loans will have to be written off, or given time for underlying asset values to recover and for the companies to trade out of their difficulties.
That in turn requires a grasp of what state the economy will be in and how soon we will see a business recovery. And if 33 eminent economists can all get it wrong, as happened recently, what are the chances for the small private shareholders in this gamble?
However detailed the rights issue prospectus, however fine the print and however tempting the discount on last night's closing price of 85p (down 2.3 per cent on the day) this cannot be other than a huge leap in the dark for subscribing shareholders.
In view of all the uncertainties, the shares may have to be offered at a substantial discount if they are not going to be spurned by investors and left with the underwriters – a massive blow to confidence. The alternative for private investors of not taking up their rights would mean a huge dilution of their already reduced holding.
