Last weekend’s Sunday Times revealed an idea the government is apparently considering to divest itself of its £70 billion stake in Lloyds and RBS: convertible gilts.
Merrill Lynch, among many others, thinks it’s a good idea. I’m not sure I do. As I understand it, the instrument is effectively just a gilt with an out-of-the-money call on Lloyds or RBS attached. Presumably the optionality will be embedded at fair value. But, if it is, what is the attraction?
Merrill Lynch, which predicted that the Lloyds share price could more than double over the next two years, said: “It provides a bridge for income and pension funds to buy into the equity of the part-state-owned banks prior to the ordinary dividends being resumed, we think by 2013.
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