Lloyds Banking in "advanced" talks on toxic insurance escape route

Thursday, 29 October 2009 03:59

Lloyds Banking has today confirmed it is in advance talks with the Treasury on alternatives to the government's toxic asset insurance scheme.

The lender is also in talks with the European Commission over restructuring plans needed under state aid rules.

Speculation has been rife Lloyds is looking to step away from the asset protection scheme (APS) with a rights issue and a debt for equity swap for bondholders.

A statement from the lender today revealed: "Lloyds is in advanced discussions with HM Treasury, UK Financial Investments and the Financial Services Authority regarding alternatives to participation in APS."

It added any alternative proposals to the insurance scheme would be likely to include substantial capital raising.

"The capital raisings contemplated are expected to be fully underwritten and will be subject to shareholder approval," the bank added.

It also revealed if the APS is turned down it would pay the Treasury a fee in recognition of the value of the implicit guarantee Lloyds has benefited from since March 2009.

"There can be no certainty at this stage that any alternative to APS will proceed. All options remain open."

The bank added: "Lloyds confirms it is in advanced discussions with the European Commission and further details will be announced in due course.

"Based on the discussions to date it is confident that the final terms of its restructuring plan, including any required divestments of assets, will not have a material impact on the group."

There have been reports Lloyds Banking is looking to raise £15 billion in a rights issue and as much as £10 billion debt held by bondholders could be converted to shares.

Currently the taxpayer holds 43 per cent of Lloyds Banking and such a deal would see the government pushing around £5 billion into the bank to maintain the stake.
The bank is looking at the options as both a way of cutting the state's holding and avoiding a major sell-off of assets to meet European state aid rules.

Paul Mumford, senior fund manager at Cavendish Asset Management, said: "The bounce in Lloyds' share price in early morning trading is evidence of the market's desire for certainty, following weeks of speculation over a likely hefty rights issue.

"However, the rally could prove overheated.

"The finer details of the issue, including the level of discount, have yet to be unveiled - and the market remains highly charged in view of the degree, and possible ramifications, of Brussels' competition concerns."

He added shareholders and institutions would be broadly supportive of the Lloyds issue.

"A rights issue remains on balance the best move in terms of protecting their interests. Put simply, the APS is looking expensive in view of the much smaller level of losses the market now believes Lloyds is likely to sustain, leaving taxpayers with the upside of recovery rather than shareholders."

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