UK set for 70% economic stake in Lloyds

Financial Times UK
By George Parker and Jane Croft
Published: March 5 2009 23:49 | Last updated: March 6 2009 09:22


The enormity of Lloyds’ ill-fated takeover of HBOS will be exposed on Friday, as the bank’s board considers a Treasury rescue plan that could see the taxpayer take an economic stake of about 70 per cent in the merged bank.

Alistair Darling, chancellor, has agreed an outline deal that would see the government insure toxic assets of £258bn, but it would come at a heavy price.

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Mr Darling’s officials have peered into the HBOS loan book and concluded that the final insurance fee charged by the taxpayer must reflect the high-risk nature of many of its investments.

After more than a week of negotiations, Mr Darling’s officials have proposed a fee that would see the government’s economic stake in the Lloyds Banking Group rise to about 70 per cent, through the issue of non-voting, but dividend-paying, B shares.

If the government were to increase its economic interest it would be a blow to the bank’s chief executive, Eric Daniels, and the chairman, Sir Victor Blank.

Mr Daniels said last year that he regarded the government as just another name on the share register but he did not wish state ownership to rise above 43 per cent.

One big investor suggested that Sir Victor’s head should roll. “His move to buy HBOS has blown the bank up.”

The Lloyds board is also considering a separate – but related – proposal that could see the government’s £4bn in preference shares converted into ordinary shares, a move that would also give the taxpayer majority voting control of the company.

The preference shares are an expensive form of capital for the bank, carrying a 12 per cent annual coupon and incurring an interest charge of £480m.

But a conversion of those shares into ordinary shares – as Mr Darling may insist – would take the taxpayer’s voting stake in the company up from 43 per cent to closer to 60 per cent. The additional block of non-voting B shares – the fee for the insurance scheme – would take the government’s economic interest to about 70 per cent.

Shares in Lloyds gained 4.7 per cent in early trading on Friday to 42.2p.

The Lloyds board has resisted handing over direct voting control to the taxpayer and the bank insisted on Thursday night that negotiations were continuing, but it may conclude it has little choice.

Mr Darling’s officials say they are “relaxed” over whether Lloyds converts the preference shares, but point out that when the Treasury struck a similar deal with RBS it insisted on turning them into ordinary shares.

“There are still extensive negotiations and the Lloyds board still has to get their head around this and agree to it,” said one person with knowledge of the situation, who suggested there was a 60 per cent chance of a deal being struck on Friday.

Peter Mandelson, business secretary, said on Friday that talks over Lloyds’ participation in the scheme were difficult.

”Obviously when you’re making a change like this, introducing new measures or instruments to enable the banks to to recover, it involves a negotiation about the terms, the pricing and all sorts of conditions that are attached and that involves a fairly difficult, tough negotiation between the government and the banks,” he told Sky News.

If the preference shares were converted into non-voting but dividend-paying B shares, the bank could use those to bolster its capital ratios but the voting stake of the government could remain at 43 per cent.

Last week, RBS announced it was putting £325bn of assets into the government’s asset insurance scheme, where the bank agreed to pay a “first loss” on bad loans while the taxpayer agreed to underwrite 90 per cent of remaining losses. The government could end up with a 95 per cent economic stake.

Another big investor said: “It is a great pity that Lloyds’ management got itself into this mess by agreeing to buy HBOS and there are investors who might be unhappy with Eric Daniels.”

Lloyds said its position had not changed and talks continued with the Treasury.

Copyright The Financial Times Limited 2009

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