Finance, Markets & Investing

Lloyds to Pay $3.6 Billion to Raise $2 Billion


By Bryan Keogh and John Glover

(Bloomberg) — Lloyds Banking Group Plc, (LLOY) the U.K. mortgage lender bailed out by the government, agreed to pay at least $3.6 billion over 15 years to raise $2 billion in capital.

The bank sold hybrid Tier 1 securities on Dec. 15 that cost 12 percent, or $240 million a year in interest, until 2024, according to data compiled by Bloomberg. That's a higher interest rate than bicycle-rack maker TriMas Corp. paid to sell senior notes, which Moody's Investors Service rates Caa1, seven steps below investment grade.

Lloyds, which is 43 percent state-owned, is paying up for the new capital after it raised about 23 billion pounds ($37 billion) in debt and equity since the beginning of November to bolster its balance sheet and avoid handing majority control to the government. The lender posted a first-half loss of 3.1 billion pounds because of writedowns on corporate and real estate loans.

"It's expensive, especially for a bank that's struggling in terms of earnings," said Simon Adamson, a senior credit analyst at CreditSights Inc. in London. "Lloyds is supposedly in a better position than it was a few months ago, but this may well be the price they have to pay to borrow."

Credit Agricole SA, France's third-largest bank by market value, is paying 8.375 percent on $1 billion of perpetual subordinated hybrid notes it sold on Oct. 5, Bloomberg data show. The notes, to which Moody's gave its fourth-highest rating of Aa3, switch to a floating rate of 698 basis points more than the London interbank offered rate if not redeemed in 2019.

Loss ProtectionTier 1 capital is used to cushion senior lenders and depositors against losses. Lloyds set aside 13.4 billion pounds for bad debts on Aug. 5, more than the 11.3 billion-pound estimate of eight analysts surveyed by Bloomberg. Provisions will drop "significantly" in the second half, the lender said.

Lloyd's perpetual hybrid securities, which Moody's rates Ba1, or one step below investment grade, can be redeemed in 2024. If that call date isn't met, the securities will float at 11.76 percentage points more than the three-month Libor, which is currently 0.25 percent.

A "large U.S. bond manager" purchased the securities in a private placement, according to Joe Dickerson, an analyst at broker Execution Ltd. in London. The deal was the result of a so-called reverse inquiry, in which the buyer approaches the seller, Lloyds spokeswoman Sara Evans in London said in a statement.

"We are delighted with the outcome and the capital flexibility that this sort of transaction gives us," Evans said. "We were in a position to react quickly and execute a transaction with 24 hours."

Basel CommitteeThe Basel Committee on Banking Supervision last week published recommendations on bank capital that would rule out banks using hybrid securities as capital and asked them to stop issuance. Lloyds agreed to the sale a day earlier.

"It's hardly clever to follow a 13.5 billion-pound rights issue with a $2 billion Tier 1 capital offering carrying a 12 percent coupon," Dickerson wrote in a report. "The ramifications for both the capital position of the bank and the cost of capital are negative."

The coupon rate on the Lloyds notes is the market price that must be paid for "deeply subordinated paper," he wrote.

TriMas, the Bloomfield Hills, Michigan-based maker of trailer hitches and bicycle racks, raised $250 million on Dec. 17 selling eight-year 9.75 percent notes that yielded 10.13 percent, Bloomberg data show. The company posted about $419 million of losses over the past three years.

Moody's defines securities rated in the Caa category as being "of poor standing and subject to very high credit risk."

Lloyds rose 0.88 percent to 49.68 pence at 10:54 a.m. in London trading.

To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; John Glover in London at johnglover@bloomberg.net.

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