Lloyds puts 60 per cent discount on record £13.5bn rights issue

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The Independent Online

The City backed Lloyds Banking Group yesterday as it revealed the terms for the UK's largest ever rights issue, set at a discount of almost 60 per cent.

Shares in the part-nationalised bank rose by more than 1 per cent as it officially announced the terms of the £13.5bn issue. Lloyds is raising the funds in an attempt to convince the Financial Services Authority that it is robust enough to avoid the Government's toxic asset insurance scheme.

Lloyds is to issue 39.5 million shares at 37p each, on the basis of 1.34 new share for each existing one held. The pricing comes in at a 59.5 per cent discount to the company's closing price on Monday night.

That discount is 38.6 per cent of the theoretical ex-rights price, the value of the shares after the issue has taken effect. The new shares will make up 57.3 per cent of the company's total capital.

Richard Hunter, head of UK equities at the stockbroker Hargreaves Lansdown, said: "Existing shareholders have certainly had a carrot dangled before them, given that the new shares are being offered at a deep discount to the existing ones."

The group's investors will meet at the NEC in Birmingham tomorrow to approve the details of the issue.

The Government will pay £5.7bn to maintain its stake at 43 per cent. Lloyds's strategy to raise more than £22bn was put together to avoid joining the Government's asset protection scheme (APS), which would have seen the taxpayer's holding rise to 62 per cent. The bank will also pay £2.5bn in return for the implicit protection from the prospect of the APS since its announcement in March. Steven Hayne, an analyst at Morgan Stanley, said the exit from the scheme via the rights issue "removes a key uncertainty surrounding the stock", and predicted that investors would back the move in the short term.

Lloyds raised £9bn on Monday by converting existing debt into bonds, an issue that was oversubscribed by £4bn. It is also looking at assets sales. Those under the hammer include Cheltenham & Gloucester and its TSB brand.

Jonathan Jackson, head of equities at Killik, said the share strength would be supported by the unwinding of short positions as well as UK institutions increasing their holdings in the stock to gain an index weighting.

He cautioned that the recovery would be based on UK economic growth "on which we remain cautious, and the ability of management to extract better-than-expected synergies from the HBOS acquisition. An additional risk is that banking sector returns may be capped by the regulator".

The announcement came a day after Lloyds revealed it was to axe another 810 jobs, partly down to Equitable Life's decision not to renew its management contract when it lapses in two years. Staff in its processing centre in Aylesbury will also be affected. It had already cut 12,500 since the merger with HBOS.