Q&A: The Lloyds share issue

Q&A: The Lloyds share issue

Lloyds Banking Group has announced the biggest rights issue in history, as it seeks £13.5bn in new capital. Here we look at what it means for the bank's 2.8 million small shareholders.

Is that what this 240-page document that has just landed on the doormats of Lloyds shareholders is about?

Yes. Lloyds Banking Group needs to find £21bn to bolster its balance sheet so that it can absorb losses on loans that have turned sour. Crucially this means it will not have to join the asset protection scheme set up by the government to insure the most troublesome loans. The document sets out the details and explains why it wants shareholders to help it raise £13.5bn through a rights issue. The other £7.5bn is being raised from bond holders.

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What is a rights issue?

It is a way companies can raise money from shareholders. It is called a rights issue because it gives existing shareholders the right to buy new shares in the same proportion as their current holding. In this way, existing investors can maintain their influence over the bank even though lots more shares are being issued.

Haven't we been through this before?

Afraid so. In April 2008 HBOS, now part of Lloyds, tried to do a £4bn rights issue but investors refused to back it. Then, a year ago, the government put £17bn into the combined Lloyds to ensure it had capital to cushion the bad debts it had acquired by rescuing HBOS.

How much does the government own of Lloyds and is it having to take part in the rights issue?

The taxpayer stake in Lloyds is 43% and will stay at this level following the rights issue because the government has agreed to buy another £5.7bn of shares to take part in the cash call.

How much will shareholders have to spend if they want to take part?

That depends. Lloyds has not yet decided the terms under which it will sell the rights and shareholders have until 11 December to decide whether to do so. By then, the bank will have written to each investor to outline how much it will cost to buy the rights.

But surely there is some idea about the pricing?

Lloyds has given a few clues. It has set a floor of 15p but this is unlikely to be the figure at which the rights are issued. It is more likely to be at a 38% to 42% discount to the share price but nothing will be decided until a few days before a shareholder meeting scheduled for 26 November. The average shareholding in Lloyds is currently worth £740.

What should shareholders consider when deciding whether to take part in the rights issue?

As the rights issue will be priced at a deep discount to the current share price, it will look very cheap. Also, if shareholders do not participate, their relative holding will be diluted because of all the new shares being issued. Those holding Lloyds shares for their dividends should bear in mind that the bank has been banned from paying dividends for two years by the EU as a penalty for all the state aid received.

Do shareholders have to take up their rights?

No. Shareholders can also sell back their rights to the bank or to a stockbroker and could then receive a cheque, provided the share price is higher than the rights price. Shareholders short of cash can also do what is known as "tail swallowing" where they sell some of their rights to raise enough money to buy the rest of their entitlement. In other words, the shareholder doesn't have to hand over any money.

What happens if shareholders don't do anything?

Lloyds will sell rights that have not been taken up in the market and give back any profit to the investors to whom the rights belonged. This will result in a cheque being sent to investors only if the share price is higher than the rights price when the cash call is completed.

How much will it cost to deal the shares?

Lloyds is offer a free dealing service for private shareholders in the UK and has set up a helpline at 0871 384 2990.

What happens next?

The current document is asking investors to vote in favour of the capital raising at the meeting in Birmingham on 26 November. Shortly afterwards, Lloyds will send out letters with the exact amount of cash investors will need to participate in the rights issue.

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