Smooth Lloyds sale is mixed omen for bank ECM
By Dominic Elliott
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The ease with which the UK government has offloaded 3.2 billion pounds of shares in Lloyds Banking Group is a mixed omen for bank equity sales. The disposal was perfectly timed and expertly sized. But unusually strong demand from U.S. funds was also a critical factor in its success.
American investors snapped up 30 percent of the offering, say two people familiar with the deal. Two U.S. hedge funds put in orders for 1 billion pounds each, one person said. That interest will have gone a long way to ensuring the sale, totalling 6 percent of the group, was 2.8 times covered.
This sale was exquisitely choreographed. Chancellor George Osborne set it in motion in a speech on June 19. Decent half-year results in July fed the momentum. Lloyds’ shares are up 50 percent year-to-date, helped by improving data on the UK economy. The 75 pence per share sale price was a tight 3 percent discount to the previous day’s close. The stock has since held firm above that level, evidence that the bookrunners were right to size the deal as they did.
It is tempting to imagine that this bodes well for the take-up of Barclays’ rights issue and the raft of other UK equity offerings to come. These include more Lloyds shares, the possible flotation of Santander’s British business, the sale of Lloyds’ TSB business, and the government’s stake in Royal Bank of Scotland.
But U.S. investor appetite for UK banks may not endure. And the strength of domestic demand is unclear. Many UK institutions already have sizeable allocations to the sector. The pressure is now on the government to offer the next tranche exclusively to retail investors – a process involving heightened reputational and market risk.
For now, Lloyds has underscored the attractions of share placings for governments and companies keen to tidy up portfolios. Such deals account for 53 percent of equity capital markets activity in the region this year, up from 46 percent in 2012, Thomson Reuters data show. The UK state is a long way from a full exit from its banks. But it is off to a great start.