Lloyds rights issue: Investor options

The group said that it was offering investors the chance to buy 1.34 new shares for each one their already own at a price of just 37 pence each. The deadline set for the rights issue is 11 December, just two and a half weeks away.

Stockbroker Hargreave’s Lansdown has produced a “rights issue calculator” to help investors decide whether or not to take up the offer and has looked at the choices facing Lloyd’s investors.

Richard J Hunter, Head of UK Equities at Hargreaves Lansdown, said, “The first of these choices is to take up the rights. This means that the stake in the company remains undiluted (unaffected in percentage terms) post the rights issue.

“The second choice is to sell the rights in the market. The alternative would be to let the rights lapse and then receive a cheque from the company in due course (at the prevailing market price when the offer closes, no commission). The share price received therefore cannot be guaranteed. This is a dilution of the shareholding.

“The final choice would be to sell sufficient of the rights to take up the balance (a “STUBS” transaction – also sometimes known as “tail swallowing”). The purpose of this manoeuvre is to take up as many rights as possible without spending any more on the shares. This would be a partial dilution of the holding.”

In addition to raising £13.5 billion through the rights issue, Lloyds is also to raise an extra £8.8 billion by agreeing with City investors to swap their existing bonds for “contingent convertibles” a new form of security, also known as “CoCos”. The CoCos will be converted into shares if Lloyds Capital reserves come under pressure.

According to Hunter, City investors have already been keen to get their hands on the new CoCos, which, he said, “should bode well for the current [rights] issue”. In addition Lloyds’ efforts to free itself from the government’s Asset Protection Scheme, which insures the bank from losses caused by toxic assets, should also be seen as a positive sign by investors, Hunter said.

Hunter noted that Lloyds’ performance was linked to the “strength and prospects of the UK economy” and that its lack of geographical diversity could “lead to the company being more exposed to defaulting debts” while the UK remains in recession.

He also warned that there was little chance of investors receiving a dividend in the near future and that there could even be a case of “investor fatigue” as this is the third time that Lloyds has attempted to raise capital with a rights issue.