Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group plc, dated May 18, 2009, announces the publication of a shareholder circular and prospectus regarding a Placing and Compensatory Open Offer. The filing details an agreement with HM Treasury to raise approximately £4 billion to redeem £4 billion of preference shares held by the UK government. The announcement also provides an update on the Group's integration of HBOS, its participation in the Government Asset Protection Scheme, and its financial outlook for 2009.
Key Financial Metrics and Capital Structure
- Capital Raising: The Group proposes to issue 10,408,535,000 new ordinary shares at 38.43 pence per share to raise approximately £4 billion.
- Use of Proceeds: Funds will be used to redeem HM Treasury preference shares at 101% of issue price plus accrued dividends.
- Capital Ratios: On a pro forma basis as of December 31, 2008, the transaction is expected to increase the Group's core tier 1 capital ratio by approximately 80 basis points to around 6.7%.
- Cost Savings: The Group expects to generate annualized cost synergies in excess of £1.5 billion (14% of the cost base) by the end of 2011 from the HBOS integration. Over £150 million in run-rate savings were realized in Q1 2009.
- Liability Management: Previous liability management exercises are expected to generate a pre-tax profit of approximately £1 billion.
- Dividend Impact: Redemption of preference shares will remove an annual dividend cost of £480 million and allow the resumption of ordinary share dividends (though none are planned for 2009).
- Profitability Outlook: The Board expects the Group to report a loss before tax for 2009, excluding the impact of negative goodwill.
Material Changes and Trading Update
Compared to the prior period, the Group has experienced a significant rise in impairment levels in its lending portfolio during the first quarter of 2009. Corporate impairments are expected to increase by over 50% in 2009 compared to 2008, driven largely by defaults in commercial real estate portfolios in the UK and Ireland, particularly within the legacy HBOS business. While revenue performance in Q1 2009 was described as "good," the net interest margin reduced due to lower deposit margins and higher funding costs. Costs in Q1 2009 were marginally lower than in Q1 2008.
Guidance, Outlook, and Risks
- Outlook: The Board anticipates 2009 will be a challenging year due to the recession and financial crisis. The Group intends to participate in the Government Asset Protection Scheme to reduce risk-weighted assets, though this remains subject to HM Treasury due diligence and European Commission state aid clearance.
- State Aid Risks: Obtaining state aid clearance may require the Group to submit a forward plan involving the cessation or disposal of certain business parts, potentially including core businesses. This could be materially adverse to the Group's interests.
- Shareholder Approval: The transaction is conditional on shareholder approval of specific resolutions, including a waiver of the requirement for HM Treasury to make a general cash offer under Rule 9 of the City Code.
- Management Changes: Chairman Sir Victor Blank announced his intention to retire by the 2010 annual general meeting.
Key Facts for Investor Verification
- Verify the final terms of the Government Asset Protection Scheme and the likelihood of obtaining European Commission state aid clearance.
- Confirm the extent of the required balance sheet reduction or business divestments mandated by the state aid forward plan.
- Monitor the actual uptake of the Open Offer by qualifying shareholders and the potential dilution if HM Treasury exercises its underwriting commitment to the full extent.
- Track the realization of the projected £1.5 billion in cost synergies from the HBOS integration against the backdrop of rising corporate impairments.
- Assess the impact of the £480 million annual saving from preference share redemption on future profitability once the 2009 loss is absorbed.