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Lloyds rights issue: Lloyds creates new regulatory capital asset class

Its £22.5 billion capital raise staves off Europe Competition Commission demands for a complete break up. But Lloyds Banking Group remains heavily dependent on state support.

Lloyds Banking Group is finally catching some breaks. Its £22.5 billion ($37.6 billion) underwritten capital-raising – the largest ever in Europe – saves it from falling even further into UK government ownership and has seen off the risk of the European Commission’s competition authority imposing a complete break-up, as it did on ING. Execution analyst Joseph Dickerson says the EC’s plan for ING “looks to us like a pre-pack bankruptcy expected to be funded by common shareholders via a rights issue”. So Lloyds and its investors are mightily relieved not to share such a fate and its bonds and equities rallied as the £13.5 billion rights issue priced and the £9 billion bond exchange closed at the end of November.

Lloyds had been in negotiations with the EC long before the combined rights issue and exchange offer was devised with the help of UK regulators. Only as it approached launch did the competition authority approve a plan to divest 600 branches, comprising Cheltenham & Gloucester, Lloyds TSB Scotland and some others together equivalent to 4.6% of current account market share and 19% of the group’s mortgage book. Lloyds airily dismissed these state-aid remedies as immaterial. How did it get such a good deal? 

"I think the fact that Lloyds was using the public capital markets was critical to the Commission," says Matthew Greenburgh, head of international financial institutions advisory at Bank of America Merrill Lynch, which was joint adviser, joint global co-ordinator and joint bookrunner on the deal alongside UBS.

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