Lloyds cash call expected Tuesday

2nd Nov 2009 15:05

Part-nationalised lender Lloyds Banking Group's £25bn recapitalisation programme will finally be made public tomorrow, according to reports.The bank is expected to raise £13.5bn from a deeply discounted rights issue, possibly at 50p a share, with the British government subscribing for £5.5bn of shares in order to maintain its 43% stake.It's also expected to reveal sweeteners to persuade existing bondholders to exchange their bonds for riskier investments that could convert into equity.The Financial Times says these contingent convertibles, known as 'Cocos', could bring in another £7.5bn.This bond financing would count towards core tier one capital and convert into equity in the event of a "stress scenario", such as Lloyds' core tier one ratio falling below a figure of about 6%, according to the newspaper. The ratio would be 8-10% post-rights issue.It will also pay the government £2.5bn in order to avoid being tied into its £260bn toxic asset protection scheme. The "break fee" recognises benefits gained since the scheme was announced in March.Lloyds is desperate to limit the impact of any clampdown by the European Commission on banks that have benefitted from state aid. It admitted on Friday that it is in advanced discussions with the EC regarding the terms of a restructuring plan to address its bailout.The government, which put pressure on Lloyds to buy struggling HBOS, pumped £17bn into Lloyds last October to keep the bank afloat, although £2.3bn has been paid back.The latest speculation comes as weekend press reports suggest Chancellor Alistair Darling will bow to pressure from Brussels and agree to break up banks that are supported by the taxpayer. Darling is expected to announce that Lloyds and RBS will be stripped down and various parts sold to new owners, creating as many as three new institutions on the high street, says the Times."Uncertainty over the path of economic recovery, combined with a lack of visibility over the potential for further credit losses, means an investment in either RBS or Lloyds remains very high risk," said Jonathan Jackson, head of equities at Killik Capital."We would expect both stocks to continue to exhibit a high degree of volatility over the next few days."