Lloyds unveils biggest UK cash call

Published on Tuesday 24 November 2009 21:25

LLOYDS Banking Group shares made the biggest gain on the market last night after announcing details of the biggest cash call in UK history.

Shares gained 2.34p to 93.81p after it said it would offer new shares at a hefty 59.5 per cent discount to the previous night's closing price.

But the market's positive reaction to Lloyds 13.5 billion rights issue was tempered by warnings to investors to proceed with caution, as the fundraising was considered a far cry from securing the bank's future.

Justin Urquhart Stewart, director and co-founder of Seven Investment Management, said the discounted shares were cheap, but the bank still faced a significant risk of being nationalised if the economy faced further falls. He also said investors who bought the heavily discounted stock would be taking a "leap of faith".

"Investors have to be extremely careful," he said. "If you are willing to take a five-year view, somewhere inside Lloyds there is a profitable clearing bank, but it is surrounded by the most awful selection of rubbish.

"But there is still a 50 per cent chance of nationalisation. It will be a leap of faith you will see some profit on it. But at least if you take your shares up, it won't cost very much."

Bryan Johnston, director of Brewin Dolphin, said the 2.8 million small shareholders, including those of HBOS who had stuck by the bank, might want to prevent their holdings being diluted, but he warned European competition law might yet stifle the bank's return to profit.

"If you have hung on this long now, my inclination would be to take it up," Johnston said.

"My continued worry is the implications of Brussels bureaucrats on the structure of Lloyds as it currently stands.

"Will that postpone the prospect of getting the government monkey off the company's back?"

Simon Maughan, a bank analyst with MF Global, said the institutional investors would support the rights issue because they tended to be underweight in the financial sector, but he said small investors might be better off with other shares.

"If I were a retail investor, I would be selling my rights and buying Barclays shares," Maughan said.

Analysts and investors expect a relatively strong take-up and interest in the stock, not least because Lloyds' position in stock-market indices forces tracker funds to maintain their weightings.

The fully underwritten fundraising will cost the bank 500m. At the 37p rights price, underwriters Merrill Lynch and UBS stand to make 143m on the deal. Additional fees will be paid to a large team of banks, including Citigroup, Goldman Sachs, JPMorgan Cazenove and HSBC.

The government, which has agreed to underwrite its portion of the cash call, will collect a fee of 143.7m, after subscribing for 5.8bn of new shares.

Maughan said the cost of underwriting the rights issue was "incredibly expensive".

He went on: "Look at the Lloyds underwriting: they get a cabal of banks together so there is no competitive bid on the pricing, you get a massive discount, the government underwrites 43 per cent of it and still they pay you a massive fee.

"You are trying to tell me investment banking isn't the best business in the world?"

Urquhart Stewart said: "You can virtually make your fee up.

"The government has been taken for a ride on these issues. At the moment, all they are trying to do is cover a broken arm in plaster. What they need to do is consider whether they need the arm or not."

Lloyds' discounted 13.5bn cash call – slightly larger than HSBC's rights issue earlier this year – comes alongside a 9bn debt exchange and is a key plank of a capital-raising scheme underscoring rekindled investor enthusiasm for the banking sector as it recovers from the credit crunch.