Lloyds Banking Group will publish the prospectus for its £4bn share placing on Wednesday afternoon and all eyes will be on paragraph 1.3. It covers potential changes Lloyds could be forced to make in order to get EU State Aid Approval for this share placing, previous ones and the use of the government’s asset protection scheme.
We are unclear whether this is the usual cautionary warning that comes with large fund raisings or something more more serious. However, in a statement issued this morning, Lloyds says it will be required to submit a ‘forward plan’ to the EU Commission.
As a result of the state aid given in the context of the placing and open offer in November 2008 and the Group’s participation in HM Treasury’s credit guarantee scheme, the Group is required to co-operate with HM Treasury to submit a forward plan to the European Commission. In addition, the Group’s intended participation in the Government Asset Protection Scheme will be subject to obtaining state aid clearance from the European Commission for the scheme.
Which could result in the following:
The terms of such forward plan are likely in particular to include the obligation to reduce significantly the size of the Group’s balance sheet and/or behavioural restrictions. The Group expects such reduction in the balance sheet to be achieved through making divestments of or exiting non-core businesses. However, a reduction could require the Group to divest or exit core businesses. For further details on state aid, including the potential behavioural restrictions, please see Risk Factor 1.3 set out in Part II (“Risk Factors”) of the Prospectus.
Divest core businesses!
Analysts don’t think it will come to that, but say Risk Factor 1.3 once again highlights the political risks associated with the government’s 43 per cent holding in Lloyds.
Here’s Jonathan Pierce at Credit Suisse.
Overall, it is difficult to know whether this is a serious issue given the bank must highlight even low probability risks in the context of an open offer. But it comes back to our point that the political risks associated with Government holding a large part of the capital base and, just as important, providing substantial liquidity assistance — we estimate up to £140bn through SLS and CGS — are serious considerations for shareholders.
Related link:
Blank verse – FT Alphaville