'Shock' for Lloyds shareholders

By Ben Shore
Reporter, BBC Working Lunch

The bank announced that it will also sell hundreds of branches

For many Lloyds Banking Group shareholders the last week has been something of a shock.

On Tuesday, the banking group announced a huge £13.5bn rights issue. This is when the company issues new shares and sells them to existing shareholders at a discount. In exchange it gets the cash it needs to shore up its balance sheet.

Lloyds, which is 43.5% owned by the government, announced it was staying out of a government-run insurance scheme, instead raising money partly through the rights issue.

But £13.5bn will not be enough to satisfy the Financial Services Authority, which wants UK banks to have more reserves, or in financial jargon "core tier 1 capital".

So in addition to its rights issue, Lloyds is undertaking something called an "exchange offer". This means it will offer bonds to existing investors who own what are called "preference shares".

Preference shares are not the same as ordinary shares because the company is obliged to pay a fixed percentage of their value to the owner. They are traditionally seen as a very safe investment.

By grabbing back £7.5bn worth of its own preference shares, Lloyds' balance sheet will look much more secure.

But there are a some twists in the detail that have angered small investors.

'Commitment'

First of all, their hand is being forced because Lloyds is very likely to stop making regular payments to holders of its preference shares.

We have developed a tailor-made offer which will enable [some investors] to participate on terms and a timetable more suited to their circumstances Lloyds Banking Group Darling hails Lloyds and RBS move Will banks split affect customers?

This is because the European Commission does not want a taxpayer supported company paying money to its creditors.

Secondly, anyone whose holdings are worth less than £1,000 will not be eligible to exchange their preference shares.

This has the effect of excluding some 120,000 investors from the exchange offer, although Lloyds has insisted that a cash offer will eventually be made to these people.

"As a demonstration of our commitment to them, we have developed a tailor-made offer which will enable them to participate on terms and a timetable more suited to their circumstances," a Lloyds spokeswoman said.

But it is not yet clear when this will happen and how much each investor will get in exchange for their shares.

Exchanges

Furthermore, the Lloyds exchange offer has annoyed many investors with larger holdings because of the way the exchange offer will be managed.

The exchange offer is being placed on two trading exchanges, called Euroclear and Clearstream. But many individual investors will have their investments managed by brokers who use a platform called Crest.

In other words, unless they change their stockbroker they will not be able to take up the offer.

Richard Gray, from Carluke in Lanarkshire, whose wife holds Lloyds preference shares in an ISA, told the BBC: "The shares were purchased on one platform, it seems only reasonable that any shares that are to be converted should be tradeable on the same platform.

"To move the shareholdings [to a different broker] you would have to move the whole ISA."

But Lloyds said that if investors really wanted to take up the exchange offer it was straight forward to do so.

"Most mainstream brokers have accounts at Euroclear, Clearstream and Crest. Where this is not the case, we believe there is time for individuals to switch stockbrokers to allow them to participate," the Lloyds spokeswoman said.