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Lloyds rights issue: what it means for shareholders

Lloyds Banking Group outlined details of its proposed £13.5 billion fund-raising in what is set to be Britain’s biggest ever rights issue.

Q: How is the bank proposing to raise the money?

A: Through a rights issue – the selling of new shares in the company at a discount. Existing shareholders will be offered the new shares in proportion to their holdings.

Any not taken up may be bought by other investors, or ultimately the investment banks underwriting the process, which have pledged to mop up any unwanted shares to ensure Lloyds gets its money. This fund-raising comes in addition to an £8.8 billion debt conversion offer that did not need shareholder approval and already went through yesterday.

Q: Why is Lloyds raising this cash?
A: The bank, which is 43pc owned by the taxpayer, wants to avoid taking part in the Government’s toxic asset protection scheme (APS).
Under the original terms, Lloyds would have paid £15.6 billion to insure £260 billion in loans under the scheme – raising the taxpayer stake to 62pc. Royal Bank of Scotland, which is taking part in the APS, will end up being 84pc owned by the Government after it puts risky loans up for insurance. But Lloyds will have to pay the Government a fee of £2.5 billion in return for the protection already provided by the taxpayer since the announcement of the asset protection scheme earlier this year

Q: What is the offer on the table for shareholders?
A: Lloyds is offering 1.34 new shares for every existing share owned at a deep discount of 37p each – a 59.5pc discount to last night’s closing price and a 38.6pc discount to the bank’s theoretical “ex-rights” price when the extra shares will be taken into account.
Q: How much will this cost the average shareholder?
A: The typical Lloyds investor owns 740 shares and will be offered the chance to maintain their stake by buying 991 new shares at a cost of £366.67.

Q: What happens now?
A: Shareholders will attend a company general meeting at the NEC in Birmingham on Thursday to vote on 12 resolutions which enable the rights issue to go ahead.
Either 50pc or 75pc of votes cast need to be in favour, depending on the individual resolution.

Q: What happens if the rights issue gets voted down?
A: It is the second time that Lloyds has gone cap in hand to shareholders recently, after HBOS – now part of Lloyds after last autumn’s rescue takeover – tried to tap them for £4 billion in 2008, although this was only taken up by 8.3pc of investors.
But the latest plan is unlikely to meet with resistance, given the unsavoury alternative of taking part in the APS and handing majority control to the Government.
The Government – the biggest stakeholder in Lloyds – has also already said it will back the move and Lloyds is likely to have canvassed other big institutional shareholders. If it is not given the go ahead then it will have to go back to the drawing board and seek alternative ways of avoiding the APS or take part in the insurance scheme.

Q: In the event of the rights issue going ahead, what options do shareholders have?
A: Investors can buy the new shares they are offered at the discount price, therefore maintaining the proportion of the bank they own.
They can let their rights lapse and receive a cheque – for an estimated £315.84 for the average investor – from the bank in return when they are sold on the open market. But in this case, the holding they own will be reduced.
Another possible manoeuvre is “tail swallowing”, where investors sell enough rights to the new shares as to allow them to take up as many shares as they can without paying out extra money.
For a typical Lloyds investor, this would work by selling the rights to 529 new shares under the offer for £169.28, allowing them to take up rights to their remaining 54 shares, at a cost of around £169.46, not including any potential broker fees.

Q: What is the timetable after the meeting?
A: If the fund-raising is backed by shareholders, the “nil-paid rights” – the right to buy the new discounted shares – will begin trading on the London Stock Exchange the following day, November 27, for a period of two weeks.
There are various deadlines for shareholders, depending on whether they have share certificates or not and if they are taking up their rights in full or “tail swallowing”.
The latest deadline for any shareholder to take up rights in full is December 11, but some will have earlier deadlines and Lloyds will be writing to each investor with full details after Thursday’s general meeting. The new shares will start being traded on the open market on December 14.
The underwriting banks will sell rights on behalf of those investors who choose to do nothing and they will receive a cheque.

Q: How many shareholders are there?
A: There are 2.8 million smaller investors, many of whom are former HBOS savers who picked up stock when Halifax de-mutualised more than a decade ago. The remaining shareholders are institutions such as pension funds and investment firms and, of course, the taxpayer.

Q: What will it cost the Government to take part?
A: The Government – or taxpayer – will have to fork out £5.7 billion net of an underwriting fee to maintain its stake at 43pc, on top of the mammoth £17 billion already pumped into the group.