Two top shareholders of Lloyds Banking Group showed little appetite for a cash call amid reports the lender might seek billions of pounds from a rights issue to avoid the cost of a scheme to insure bad debt.
Lloyds, 43 percent-owned by the UK taxpayer, agreed earlier this year to include 260 billion pounds ($433 billion) of risky assets in the British government-backed insurance scheme, to shield it from massive losses if the recession deepens.
But optimism over its first-half results last week and a confident outlook prompted questions over its participation in the Asset Protection Scheme. Industry sources and analysts said the bank could instead gauge appetite for a rights issue to avoid the 15.6 billion-pound cost of the government insurance.
Newspaper reports over the weekend and on Monday said that Lloyds, which has already raised 4 billion pounds from shareholders this year, could raise up to a further 15 billion on the stock market, sending the lender's shares down more than 4 percent.
SHAREHOLDER DOUBTS
Two top shareholders said on Monday they were uncertain if the bank could raise the extra cash or whether it would be worthwhile sidestepping the government scheme.
"We really don't see how this could be made to work," one top ten shareholder, who declined to be named, told Reuters.
"I also think it would be quite surprising if there is that much appetite for Lloyd's stock. I really can't see how they could engineer this at all."
Another top ten investor said there were too many variables, including the government's own willingness to participate — a critical issue, given its more-than-40 percent stake in Lloyds.
"Why are they doing this? Is this because they genuinely think the worst is over or is it because they don't want to pay a hefty fee for the government's protection? I just don't think it's a fait accompli yet," the investor said.
Lloyds said in a statement on Sunday that it was working with the Treasury on the terms of its intended participation in the Asset Protection Scheme and expected "to conclude these discussions and agree terms that are in the best interest of shareholders".
The bank declined to comment further on Monday on any alternative plans.
EU HOLDS THE KEY?
Analysts, however, said the European Union could yet hold the key to Lloyds' decision — particularly if it toughens threats to force the bank to sell assets or limit its market share in some key areas.
"The elephant in the room is what the EU decides to do with Lloyds' business model," said Simon Maughan, analyst at MF Global. The risk that investors miss out on those long-term rewards could encourage them to support a cash call, he said.
"The shareholders' arms could be twisted here. (New chairman) Win Bischoff doesn't arrive until mid-September and there's no harm in Victor Blank going round and asking shareholders what they think, and could the incoming chairman carry it off," Maughan added.
The merits of a rights issue over the APS would likely hinge on the outlook for bad debts, and prospects remain grim despite Lloyds' optimism that it is through the worst.
Royal Bank of Scotland, in which the government also holds a critical stake, warned on Friday against "overinterpreting" positive indicators, telling shareholders and investors it could be years before impairments subside.
"For it to have legs you've got to believe the loss severity on APS assets would be much lower than estimated 3 months ago. I'm most unconvinced," said Ian Gordon, analyst at Exane BNP Paribas. "It would be an astonishing U-turn.
"I would find it surprising that Lloyds and/or HM Treasury would want Lloyds to go down a less prudent route leaving it carrying the tail risks for a portfolio of low quality assets."
At 1058 GMT, Lloyds shares were down 4.1 percent at 97.8 pence, lagging a European banking sector that shed 0.7 percent.
