Lloyds agrees £260bn deal for risky assets

Lloyds Banking Group and the Treasury sealed more than a week of fraught negotiations last night with a deal that will see the Government insure about £260bn of risky assets and take an economic stake of up to 75 per cent in the embattled bank.

Under the terms of the deal, Lloyds will swap the Government's £4bn of high-cost preference shares for ordinary equity, giving existing shareholders first refusal on the new shares at a slight discount. If investors do not take up the offer, the Government will do so, taking the state's interest in Lloyds from 43 per cent to about 65 per cent.

To pay for the Government's guarantees on Lloyds' assets, the bank will issue non-voting stock, called B shares, taking the state's potential interest in the bank to about 75 per cent.

Lloyds, already under pressure from shareholders over its takeover of HBOS, has been battling to stop the Government gaining a majority stake. But the Treasury team has driven a hard bargain over the capital Lloyds should hold against HBOS's stricken assets. The agreement to let shareholders have first refusal on the new stock could help assuage investors and allow Lloyds to argue that their pre-emption rights were not flouted. Lloyds declined to comment last night.

Shareholders reluctantly approved Lloyds' emergency takeover of HBOS, announced in September, but have grown increasingly angry after huge charges on HBOS's corporate loans and investments sent the group to a loss for 2008 with a further loss predicted this year. Lloyds needs the Government's guarantees but has been battling on terms because it would not have needed state capital if it had not bought HBOS in a deal orchestrated by the Prime Minister.

Full details of the agreement are due to be announced today. Lloyds will take a "first loss" on the loans and investments, expected to be similar to the 6 per cent agreed by Royal Bank of Scotland last week, with the Government covering about 10 per cent of any subsequent losses. The Government is insuring the two state-dominated banks' loans to free capital for lending into the sharply slowing economy.

Lloyds shares have lost about two-thirds of their value this year on concerns about the HBOS deal. The stock rose 4 per cent to 42p yesterday on hopes that talks with the Treasury would lead to a deal.