How do you square this circle? The government wants to sell its stakes in Lloyds Banking Group and RBS, but wants to do so in a way that maximises taxpayer value.
One way, according to an article in the Sunday Times, is through a new security – a convertible gilt.
ADVISERS to the government are working on a secret plan that could allow the state to start cutting its shareholdings in British banks just weeks after the general election.
The plot would see the Treasury create “convertible gilts” — government bonds that could be exchanged for shares in the banks once certain price targets are met.
It is understood that a sale of the new instruments could be launched as early as June, if officials decide to press ahead with the plan.
The banks team at Merrill Lynch think this is an ingenious idea, which could potentially reduce this huge stock overhang and help the share prices of Lloyds and RBS.
Here’s why:
It provides a bridge for income + pension funds to buy into the equity of the part state-owned banks prior to the ordinary dividends being resumed, we think by 2013. As the natural buyers of bank equity this is clearly very important.
If the UK Government follows the plan the effective securitisation would also help fund the budget deficit near term, an issue the both equity and credit investors have been concerned about.
If the scheme goes ahead then the banks could even buy in some securities for use as liquidity. In our view, this would provide them with the optionality over future capital structure if, by say 2012, following their huge recapitalisations they find that they are left with surplus capital.
A win-win situation then.The strike price on the bonds would be set above the current break even points – 63.2p for Lloyds and RBS 49.9p according to UK Financial Investments – and taxpayers would make a profit.
In reality, HM Treasury will need to use a number of instruments to shift the banks’ stakes, which are worth a combined £70bn. But this would be a start, and certainly more attractive than phased massive share placings.
Related links:
Lloyds data outmuscle message of tough love – FT
Why we can’t bank on Darling’s promise – Nils Pratley
Taxpayers’ bank stakes: Still out of the money – Robert Peston