You may recall a bit of a kerfuffle breaking out over the fees Lloyds would pay its advisors for its rights issue-assisted Asset Protection Scheme dodge.
So, it was interesting to see on Tuesday that the bank will pay expenses of around half a billion pounds for the services of its bankers – especially after it was reported that the fees had been slashed after the government complained.
But what is even more interesting is that some of these fees will actually be paid to . . . Her Majesty’s Treasury!
From the Lloyds APS statement:
. . . the Company has agreed to pay to HM Treasury (or to such other person as HM Treasury may direct) the HMT Commitment Commission. If HM Treasury had not committed to participate in full in respect of its entitlements under the Rights Issue, then the Group would have sought to ensure that HM Treasury’s entitlement under the Rights Issue would have been covered by the underwriting commitments given by the Underwriters in which case an amount similar to that to be paid to HM Treasury would have been expected to have been paid instead to the Underwriters.
In short, this means that HM Treasury has argued that if it had refused to take up its rights then Lloyds would have had to pay additional underwriting fees to its banks, and thus the government deserves to be compensated for its commitment.
The structural details of the discount used in Europe’s largest-ever Equity Capital Markets transaction, lingering in the lower reaches of the statement, also make for interesting reading:
The Rights Issue is fully underwritten pursuant to the Rights Issue Underwriting Agreement and the HMT Undertaking to Subscribe. The New Shares will be issued at price equal to the higher of (i) 15 pence per New Share and (ii) a price which is within a range of 38 per cent. to 42 per cent. discount to TERP, taking account of market conditions and other relevant factors.
By issuing the shares at 15p the rights issue is being underwritten at a whopping 83 per cent discount, based on Monday’s close of 85p. This could raise eyebrows in certain quarters – especially when viewed in conjunction with the fees pool.
Sounds large, but when calculated according to the Lloyds theoretical ex-rights price (TERP) this represents a less staggering discount range of 38 to 42 per cent to TERP. The banks advisors would also argue that in a rights issue structure the discount is only of theoretical significance to existing shareholders.
In other UK banking related news, RBS have been put under various corporate ASBOs, so to speak, under the revised conditions of its APS participation.
Under one such “behavioural measure” imposed upon the stricken bank, RBS’s Global Banking and Markets division have been told they can be ranked no higher than number five in the combined global all debt league tables for three years.
For the type of investment banker who attaches near-mystic significance to league table rankings, this will be the most painful blow of all.
Related links:
Lloyds and RBS unveil fundraising moves – FT
Royal Bank hanged, drawn and quartered – FT Alphaville
Lloyds short squeeze? – FT Alphaville