Lloyds Launches Record Rights Issue

Lloyds Banking Group today announced details of what will be the largest ever rights issue, to raise some £13.5bn in new capital from its shareholders.


The rights issue is taking place in order to rebuild the group’s balance sheet, replacing capital that has been eroded following the takeover of HBOS, and will result in the group not having to take part in the government’s Asset Protection Scheme (APS).

36.5bn new shares will be created at an offer price of 37p per share, should the rights issue be agreed by shareholders this Thursday.  Shareholders will be offered 1.34 new shares for each existing share they own.

The rights issue is priced at a discount of around 60% to the current price, and a disount of some 39% on the theoretical ex-rights price (the likely price taking into account the number of new shares in issue). 

Lloyds will be hoping that shareholders fully subscribe to the offer in order to avoid dilution of their existing holdings. 

While dilution is always something that should be considered in a rights issue, the key issue is one of opportunity cost.

For example, once an individual is aware of the cost of the rights issue to them, they should consider other opportunities for that money.

Avoiding dilution is one thing, but if your view on the stock market, the UK economy (to which Lloyds is inextricably linked), the banking sector or on Lloyds itself is negative, then you should consider other options.

Would you be happier with cash in the bank?  Do you see better prospects for bonds rather than shares?  Do you need to diversify your share portfolio away from a particular stock/sector/economy?

Rather than taking up their rights in full, shareholders will also be able to sell the rights in the market (the price of the rights will be more volatile than the ordinary shares, and inexperienced individuals trading in rights should take care and, if required, advice).

Individuals who do not wish to commit any more capital to the company will be able to undertake what is known as a ‘tail-swallow’.  Here, some rights are sold in order to take up the remaining rights.  Your broker may offer this service.

Finally, shareholders can let their rights lapse.  The rights will then be taken up by the underwriters of the rights issue and shareholders will receive a cheque for any profits that arise.

Assuming the rights issue os agreed by shareholders on Thursday, the rights will begin trading on the LSE the follwing day, for a period of two weeks.

The latest deadline for advising Lloyds of your particpation in the rights issue is December 11th, however individuals wishing to tail-swallow or whose holdings are lodged with brokers should investigate the possibility of earlier deadlines.

Be sure to visit our pages on rights issues to help you understand the process more fully.

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