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Rights and wrongs at Lloyds Banking
If you’ve ever wondered how the big-shot investment bankers “earn” their bonuses, the document launching Britain’s biggest rights issue will give you a clue. Lloyds Banking Group is issuing 36,505,088,579 new shares, to add to the 27,161,682,366 currently in issue.
The new shares will raise 13.5 billion pounds, of which 500 million pounds will disappear in the expenses of the offer. Much of this is paid to the banks which are guaranteeing that Lloyds gets its money, a reward for the risk they are taking that the shareholders will fail to take up their rights.
So just how big is this risk? Here’s one way to look at it. The rights price is 37 pence, and as long as the Lloyds share price remains above that, the risk is minimal. At 37 pence, engorged Lloyds, with 63,666,770,945 in issue, would be capitalised at 23.5 billion pounds, including the 13.5 billion pounds of new money. On Tuesday, the day the issue was priced, with Lloyds old shares at 91 pence, the business was valued at 23.5 billion pounds.
In other words, for the underwriters to pay up, the value of old Lloyds would have to slump from 23.5 billion pounds to 10 billion pounds – and all by December 11, the day on which the new money is due.
What if the banks don’t make that call?
Now pay attention. Would you rather buy the Co-Operative Bank 5.55555 percent callable perpetual subordinated bonds at 78 pounds percent, or the same bank’s 13 percent perpetual at 147 pounds percent?
Before you answer, here are a few numbers: the 5.555 stock yields 7.12 percent, and 10.46 percent to the call in 2015, while the 13 stock yields 8.84 percent until hell freezes over or the Co-Op Bank goes bust.
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The Wall
