Lloyds prices rights issue at 37p

24th Nov 2009 07:02

Lloyds Banking Group has priced its world record £13.5bn rights issue at 37p a share, a discount of 59.5% to last night's closing price.Britain's largest mortgage lender will offer shareholders the chance to buy a total of 36.5bn shares on the basis of 1.34 new shares for every 1 share held.The cash call represents a discount of 38.6% to the theoretical ex-rights price (TERP) based on Monday's closing price, in line with previous indications.It had already said the offer would be priced at either 15p, or a discount of between 38% and 42% to the TERP, confirmed today as 60p, whichever was the higher. Its shares had traded as low as 83p after the bank announced its £22.5bn fundraising on 3 November, but they've improved since, which increased the rights price. The government is taking up its rights as part of the issue, investing £5.7bn net of an underwriting fee, to keep its stake in Lloyds at 43%. Shareholders will get their say later this week. A specially-convened meeting in Birmingham will house largely supportive institutional shareholders, although there are 2.8m private investors who may need a little more convincing.Jonathan Jackson at broker Killik Capital thinks the shares will remain volatile in the short term, with potential upward pressure from the unwinding of short positions and the prospect of UK institutions upping their holdings in the stock to achieve an index weighting. "In the medium term, however, the shares remain a pure play on UK economic growth (on which we remain cautious) and the ability of management to extract better-than-expected synergies from the HBOS acquisition," he says. There's also the risk that banking sector returns may be capped by the regulator.Yesterday's news that investors had responded well to the bank's offer to swap existing debt for contingent capital, bodes well for the remainder of the fundraising though. Offers to exchange £12.51bn of existing securities were received, of which £8.78bn have been accepted, said Lloyds today. It's issuing almost £7bn of enhanced capital notes (ECN), a new type of hybrid debt, plus a further £1.48bn of shares, cash or ECNs. The company has also upped the maximum number of ECNs, or CoCos (contingent convertible core Tier 1 securities), it will issue as part of the US exchange offer from $800m to $986m. Earlier this month, the UK's third-largest lender said it was raising £21bn from a £13.5bn rights issue and £7.5bn swap of existing debt for contingent capital. The bond financing, later increased by £1.5bn due to high demand, counts 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 5%. This massive fundraising exercise is all part of Lloyds' plan to avoid being tied into the government's £260bn toxic asset protection scheme. It's already agreed to pay a £2.5bn break fee, having already received cover since the scheme was implemented earlier this year.