“Finanzkrise Reloaded”, “Finankrise 2.0″? Oder setzt sich nun mehr und mehr die Erkenntnis durch, dass diese Krise noch lange nicht “erledigt” ist? Die Commerzbank kommt bei dieser Studie übrigens laut nachfolgendem Bericht auch nicht gut weg.

Gefunden bei sonntagszeitung.ch:

Aus der aktuellen Ausgabe

UBS fehlen 130 Milliarden Franken

Credit-Suisse-Studie legt Finger auf einen neuen wunden Punkt: Refinanzierung und Liquidität

Von Beat Schmid

London Eine nicht für die Öffentlichkeit bestimmte Studie der Credit Suisse legt den Finger auf einen neuen wunden Punkt bei den Banken.

Auf 40 Seiten untersucht sie den eigentlichen Kernbereich der Institute: die Liquiditätsversorgung und die Finanzierung des Bankgeschäfts. Laut den Autoren der Studie «European Banks Core Funding» wird dieses Thema in den nächsten Jahren massiv an Bedeutung gewinnen.

«Der Wegfall der Liquiditätshilfen und die Verkleinerung der kurzfristigen Wholesale-Finanzierungen wird das grösste Thema für europäische Banken in den nächsten Jahren werden», heisst es in der Studie. Die Autoren messen der Finanzierung mindestens so grosse Bedeutung bei wie der Eigenmittelausstattung.

Insgesamt haben Bankenanalyst Daniel Davis und seine acht Kollegen 24 europäische Banken unter die Lupe genommen, darunter die UBS als einziges Schweizer Finanzinstitut. Ihren eigenen Auftraggeber, die Credit Suisse, haben die Analysten ausgeklammert.

Die UBS kommt einmal mehr schlecht weg. Sie schneidet am fünftschlechtesten ab, noch schlechter sind Commerzbank, Dexia, Lloyds und RBS. Am besten kommt die griechische Bank EFG weg. Auch die spanischen Banken BBVA und Santander werden positiv bewertet.

Die Studie kommt zu einem ernüchternden Ergebnis: 18 von 24 Banken sind zu kurzfristig finanziert. Die CS-Studie beziffert den Finanzierungsbedarf auf 13 100 Milliarden Franken. Bei der UBS beträgt der Aufholbedarf 86 Milliarden Euro oder umgerechnet 130 Milliarden Franken. Die Gesamtkosten für die verbesserte Finanzierung schätzt die Studie auf 18 Milliarden Franken für alle Banken.

Der Grund für die schlechte Finanzierungssituation der Banken: Seit Ausbruch der Krise sind sie zu stark abhängig von kurzfristigen Finanzierungshilfen von Notenbanken. Diese mussten den Banken unter die Arme greifen, nachdem klassische Mittelbeschaffungsquellen wie etwa der Interbankenmarkt versiegten. Die Credit Suisse geht davon aus, dass diese Hilfen in den nächsten Monaten massiv zurückgefahren werden.

Zudem laufen die Bestrebungen der Regulatoren darauf hinaus, die Bestimmungen zu Finanzierung und Liquidität deutlich zu verschärfen. Die Schweiz und England wollen höhere Liquiditätspuffer. Einen Schritt weiter gehen die Vorschriften der Zentralbank von Neuseeland. In den Augen der CS-Spezialisten nimmt die Reserve Bank of New Zealand weltweit eine Vorreiterrolle in Regulierungsfragen ein.

Die CS-Analysten haben das Neuseeland-Modell für ihre Studie adaptiert. Die Basis bildet die sogenannte Kernfinanzierung (Core Funding). Diese schliesst unterjährige Kredite von Notenbanken in den Berechnungen aus. Kurzfristige Kundeneinlagen werden lediglich zu 90 Prozent angerechnet. Setzt man das Core Funding ins Verhältnis zur Bilanz, erhält man das Kernfinanzierungsverhältnis (Core Funding Ratio). Ein Verhältnis von über 70 Prozent gilt in den Augen der Credit Suisse als ausgewogen, ein darunterliegender Wert signalisiert eine zu aggressive Finanzierung. Die UBS kommt auf einen Wert von nur 57 Prozent. Die CS-Analysten sind überzeugt, dass die Core Funding Ratio als Messgrösse dereinst eine ähnlich wichtige Rolle einnehmen wird wie die zuletzt oft zitierte Tier-1-Ratio.

Publiziert am 29.11.2009

Hurrah!

Hopefully one will have stopped sniffing and coughing and generally feeling urrrrcccckkkkkggggghhhhhhhh by then! The Pogue’s christmas song was on the radio this morning and has got me in the mood…only christmas song I like, and yerrr, I know its not particularly jolly but all the sugar coated crap makes me cringe! Well apart from Springteen’s version of Santa Claus is coming to town but Springsteen’s versions of anything are in my mind exempt from all criticism! (Hmmmm well, yes, ok, I, along with some other die hard fans were a little disappointed at Glasto this year…he didn’t really seem to get that it was different from a usual tour and that what we wanted to hear the classics, however I was somewhat clouded I think what with me and Mr Knightley nearly being killed in horrific crowd crush just before hand but thats another story! But I will forgive the Boss anything, I am rumoured to have been conceived at a Bruce Springsteen concert so seeing as I owe my life to him…lol!)

So I have been a bit under the weather, which hasn’t been pleasant but I have been well looked after and we have experted our crossword skills what with me retiring to bed at 7pm every night. But feeling a little better today and really quite jolly (is it possible to get high off too much cough medicine hmm?) Hoping I will be able to get out and enjoy some frisky friday fun wo ho!

So points of view for this week:

1. Lloyds bank shareholders: Get over yourselves! Yes there is space for a lot of anger against the wanker-bankers but I think this really is misplaced. Moaning about secret bank loan to HBOS…what did they expect? If it was announced there would have been a run on the bank, millions of people would have lost their savings and the country would have ground to even more of a standstill. Sometimes we have to take one for the team as it were, and whilst it may be unfortunate, it was necessary. So there. And don’t mistake me for sympathising with HBOS -  I am a customer and am outraged that if I go 50p over my overdraft I get charged £62 in fines, not to mention that as of Dec 6th the cost of said overdraft will double ’we’re simplifying the system for your benefit!’ READ – we’re screwing you for more money. Notwithstanding the fact that as a British tax payer, I have given you twice as much this year to keep you a float (Think its £3k per head of pop)  than I actually owe you, you buggers!

2. Moving civil service out of London to save dosh and decentralise system: Bloody brilliant GB (although Mr Knightley and I have been talking about it for years, so I won’t give you all the credit! In fact,  it is one of my favourite political fantasies!) I think they should move it all-Parliament is too small and the space too adversarial. Turn it into a museum, build something new, inclusive and funky, a la Scotland and shift everyone up north. Manchester is appealing but personally I favour Birmingham, there’s something to be said for seating power in the middle of the country I think. Expenses would be halved and we might actually be able to get things done. Good all round.

3. The tories crazy alliance with some tres dodgy antisemitic Eastern Europeans: Wake up and smell the coffee people! This is the reality of the conservative party. Yes, whilst I agree it is despicable and gives British politics a bad name, etc, etc, etc, I am actually thinking its quite good in a sick, party political way because anything that exposes the terrible tories for what they really are has to be good in an election year! And I am not surprised. I have known, worked with, lived with and drank with a lot of Eastern Europeans in my time (even in Twee Tory Town, yep!) and whilst they have been interesting, funny, warm, good card playing, mean drinking, fun loving peeps, I have found on the whole, also a dark side of racism, misogyny and most universally, jaw droppingly callous homophobia.  

4. And finally-StorYbook: Bloody brilliant! Ok ok I know it hasn’t made headlines, but its the best discovery I’ve made this week. All aspiring creatives, check it out. If, you’re like me, and you have a three volume, time shifting, multi strand, multi character novel writing thing going on (hmmm no takers? lol!) it is a an absolute lifesaver. Intending on spending all weekend working it all out (except for time set aside for sleeping, drinking and inevitably at the moment, coughing. Urgh)

And on that note folks, have marvellous weekends full of love and sunshine and shopping no doubt! VV xx

by HM Treasury, November 26, 2009.

The Government announced on 26 November 2009 that it will move quickly to implement the reforms of bank pay and governance proposed by Sir David Walker. Sir David’s review was commissioned by the Government earlier this year to explore failures of corporate governance and management of banks.  His final report suggests a series of reforms to strengthen the role of shareholders, improve the quality of bank boards, and to increase transparency of pay and bonus policies.

Background

The Walker Review of Corporate Governance of UK Banking Industry was announced on 9 February 2009 by the Prime Minister, the Chancellor of the Exchequer, and the Secretary of State for Business, Innovation, Universities and Skills. Sir David Walker was asked to conduct a review of the corporate governance of banks and other financial firms, to recommend how financial institutions can better equip themselves to respond to lessons learnt from the crisis. An interim report was produced on 16 July and the consultation ran until 1 October 2009.

In responding to the Review, the Government has endorsed the call for major changes to the way that bank boards function, including improved risk management, more effective control and enhanced disclosure of remuneration, more effective and better informed directors, and enhanced engagement between boards and shareholders…(continue reading)

Non c’è verso. Lo si è detto, lo si è scritto, ma nessuno ci credeva. La crisi finanziaria non lascia scampo nemmeno a Dubai, patria incontrastata del lusso estremo. E a essere spaventati non sono tanto gli emiri, ma le banche europee che hanno giocato coi credit default swap sul debito sovrano a cinque anni. Hsbc, Rbs, Lloyds, Barclays e Bnp Paribas sono i soggetti più a rischio, con un complesso di passività potenziali che è di circa 40 miliardi di dollari. Chi pensava realmente che fosse tutto terminato?

La NATO del terzo millennio, l’unico blocco militare esistente al mondo, dopo essersi espansa da 16 a 28 membri nello scorso decennio, è ora impegnata nella sua prima guerra terrestre e nella sua prima guerra asiatica, in Afghanistan.
Con la frammentazione del Patto di Varsavia e l’implosione sovietica degli anni 1989-1991, la NATO – lungi dal ridimensionare il suo potere militare in Europa e tantomeno dal dissolversi – ha visto l’opportunità di espandersi in tutto il continente e nel mondo.
A cominciare dalla campagna di bombardamenti in Bosnia nel 1995, essa ha prontamente ed inesorabilmente dispiegato la sua forza militare verso est e sud, nei Balcani, in Africa nordorientale e centrale, nell’intero bacino del Mediterraneo, in Asia centrale. Così come nel Caucaso, in Scandinavia includendo le tradizionalmente neutrali Svezia e Finlandia, e nella regione Asia-Pacifico dove ha avviato dei rapporti individuali di cooperazione con Australia, Giappone, Nuova Zelanda e Corea del Sud. Oggi la NATO ha le proprie forze armate ed accordi di cooperazione con i Paesi di tutti i sei continenti. Una macchina militare che può vantare due milioni di truppe ed i cui Stati membri contano per oltre il 70% della spesa mondiale in armamenti.
Dopo aver condotto la guerra in Europa, contro la ex Jugoslavia nel 1999, ed in Asia (in Afghanistan, con sconfinamenti in Pakistan) a partire dal 2001 fino a non si sa bene quando, la NATO attualmente è protagonista di operazioni navali al largo delle coste africane nel Golfo di Aden. Essa è inoltre impegnata nella definizione di un nuovo Concetto Strategico che prenda il posto di quello risalente al 1999.
Già nel 2008, l’allora Segretario Generale Jaap de Hoop Scheffer aveva invitato a sviluppare una strategia per affrontare le sfide del nuovo millennio, domandando un incremento di bilancio vista “la crescente lista di responsabilità”. E riferendosi a queste ultime, “miriade” è la parole esatta usata lo scorso 1 ottobre - nell’ambito di una conferenza organizzata congiuntamente dalla NATO e dai Lloyd’s di Londra - dal presidente di questi ultimi Peter Levene: “Il nostro sofisticato, industrializzato e complesso mondo è sotto attacco da parte di una miriade di determinate e mortali minacce”.
Il medesimo giorno della conferenza, sul quotidiano The Telegraph è comparso un articolo a firma dello stesso Levene e dell’attuale segretario generale della NATO, il danese Anders Fogh Rasmussen. In esso si afferma che “i dirigenti industriali, inclusi quelli dei Lloyd’s, sono stati coinvolti nell’attuale processo di elaborazione della nuova linea direttiva della NATO, il Concetto Strategico; il vice-capo del gruppo è l’ex amministratore delegato della Shell [la compagnia petrolifera anglo-olandese, ndr], Jeroen van der Veer”.
Levene e Rasmussen sono stati molto espliciti nel dichiarare la necessità che la NATO protegga gli interessi economici occidentali, affermando che “gli uomini hanno sempre combattuto per le risorse e la terra. Ma adesso stiamo vedendo queste pressioni in una scala più grande… Dobbiamo prepararci a pensare l’impensabile”. L’elenco delle “minacce mortali” comprende: pirateria, sicurezza informatica, cambiamenti climatici, eventi meteorologici estremi, spostamenti improvvisi di popolazioni, scarsità di acqua, siccità, cali nella produzione di cibo, ritiro del ghiaccio artico, sicurezza degli approvvigionamenti energetici e diversità delle loro fonti…
Nel suo discorso alla conferenza, Rasmussen ha auspicato che la cooperazione con gli oltre 40 Paesi con cui la NATO ha accordi individuali o collettivi venga estesa anche a queste nuove “minacce”. Il loro crescente numero rappresenta una appropriazione, da parte della NATO, di responsabilità e funzioni che sono propriamente quelle dell’Organizzazione delle Nazioni Unite (ONU), non certo quelle di un blocco militare non eletto da nessuno ed i cui Paesi membri, messi insieme, rappresentano solo una piccola frazione della popolazione mondiale.

Maybe you saw that Lloyds is embarking on a £13.5bn Rights Issue. If you already own Lloyds shares you will be given the option to buy 1.34 new Ordinary shares for every 1 you hold, at 37 pence each.  One might expect that Lloyds would be looking for additional funds after the HBoS take-over that was encouraged by the UK government.  It has since then emerged that the value of HBoS was inflated by a secret loan made by the Government and also that apparently Lloyds chief executive and the former chairman both knew about the secret arrangement. This was not disclosed to the investors during the time of persuading that a take-over of HBoS would be a good idea. With this loan, and another such secret loan made by the Government to RBS, having been repaid early this year it is not surprising that funds are low. No, I’m not going to refer to bonuses again…

My MBA class is now busy with the Integrative Project that sees them competing against each other in a virtual market – lots of hectic decision-making and, dare I say, a bit of industrial espionage taking place! After that we have a week of revision before the exams. And then, before we know it, it is time to pack our bags and set off for the Christmas break.

Alistair Darling has today been defending the Bank of England’s “lender of last resort” loan to HBOS last October and November.

He has, rightly, said that this type of loan is a key duty of the Bank of England. He also pointed out that HBOS provided collateral for the loan, and that the loan has since been repaid in full. He also defended the decision to keep the loan secret, saying, “The Bank’s assessment at that time was that it was vital that their emergency liquidity assistance operations remained confidential.”

When similar “lender of last resort” support to Northern Rock had been leaked, it had caused a run on the bank, and its collapse. So Mr Darling’s arguments that the loan had to be made, and that it had to be kept secret, are persuasive.

The government are on less solid ground, however, on the issue of the Lloyds takeover of HBOS. Lloyds shareholders, remember, were voting on the takeover at a time when those loans had been taken out by HBOS. However, they were not told about the loans. The existence of them was very clearly material to the takeover.

We have been told that the circular to Lloyds shareholders referred to the bank’s reliance on Bank of England liquidity facilities. This is misleading. The document opaquely referred to the bank’s ongoing reliance on the “availability of Bank of England liquidity facilities”, but did not mention that HBOS had already made use of those facilities. In fact, the circular specifically stated:

“Save for the £4 billion net cash proceeds raised by HBOS in its rights issue in July 2008 and as disclosed in the sections headed ‘Group Overview’, ‘Divisional Review’ and ‘Outlook’ in Part XIII (‘‘HBOS Interim Management Statement 3 November 2008’’) of this document, which sets out the current trading, trends and prospects of the HBOS Group, there has been no significant change in the financial or trading position of the HBOS Group since 30 June 2008.”

The government have claimed that the Lloyds directors knew about the loans. If that is true, it implies serious allegations about the conduct of those directors. For they continued to back the takeover, and kept the loans secret from their shareholders.

If the government are not telling the truth, and the Lloyds directors did not know of the loans, then the spotlight would move to the HBOS directors. They clearly did know about the loans, and in that case did not disclose those material facts when opening their books to Lloyds.

I am not a lawyer. However, it is clear that either the HBOS directors or the Lloyds directors, or both, were in clear infringement of takeover rules at the very least. The government itself, I presume, was not in breach of those rules since it had no duty of disclosure to the Lloyds shareholders.

I believe the Bank of England were right to provide those loans. I believe the Bank and the government were right to keep them secret. But they, and more especially the directors of HBOS and/or Lloyds, were dead wrong to allow the takeover to proceed.

The takeover could have been very simply stopped by the government. There was no need for them to disclose the loans; they could simply have said that the situation at both HBOS and RBS was so serious that an immediate capital injection by the government was required. Then Lloyds could have simply walked away.

Of course the most serious concern of the authorities was to prevent a meltdown of the financial system. But they could have done that without stuffing the Lloyds shareholders.

The authorities have been very keen to prosecute mortgage and insurance brokers for “miss-selling” endowment policies and pensions.

And all the while they were themselves guilty of miss-selling an entire bank.

A while back now, I thought it would be interesting to monitor the Lloyds rights issue to see whether, as I strongly suspect, the rights issue process itself tends to drive down the share price – temporarily, of course. Or, alternatively, whether the market for UK retail bank shares is deep and liquid enough to prevent a mis-pricing during the issue.

Little did I know what I was letting myself in for. There are rather more side-issues than I’d reckoned on. But I’ve started so I’ll finish. I feel obliged to put the record straight on one or two points.

I’ll write again about the TERP business separately, but first need to clarify the cause of the anomaly in share numbers I attributed yesterday to a typo. I guess when Lloyds based their TERP calculation on the closing price on Monday rather than the average price that day which their Prospectus said they would use, I was ready to assume they’d made other mistakes. On the other hand, the typo assumption does seem natural, given the coincidence of the numbers. Reminiscent, perhaps, of George Monbiot’s famous deduction of the erroneousness of David Bellamy’s claims about claims about [sic] advancing glaciers.

To recap, I noticed yesterday that the numbers in Lloyds Rights Issue Price Announcement don’t stack up. Specifically, the document stated the following:

“Basis of Rights Issue 1.34 New Shares for every 1 Existing Ordinary Share [A]

Number of Ordinary Shares in issue as at the date of this announcement 27,161,682,366 [B]

Number of Ordinary Shares to be issued by Lloyds Banking Group pursuant to the Rights Issue 36,505,088,579 [C]”

Naturally, one would expect C to equal A*B. But it doesn’t. In fact, C=1.34399…*B.

The “399″ sequence led me to suspect that maybe A should actually be 1.344 and not 1.34, perhaps a reasonably easy “typo” to introduce.

In fact, I’ve been advised (and in the best journalistic tradition will not be divulging my source!) that the correct explanation is entirely different.

Attentive readers will recollect from one of my earlier posts on the subject that there are a few limited voting rights shares in Lloyds. This is what I said:

“Second, there are a small number of Limited Voting (LV) shares – 79 million, compared to over 27bn – in fact ~27,162 million – Ordinary Shares. These LV shares also have an entitlement to rights. What I don’t know, though, is how much these LV shares are worth. If each is worth much more than an Ordinary Share, and, more to the point, if the holder of each contributes significantly more than 50p to the rights issue, then the rest of us would have to put in a bit less than 50p.”

At the time I thought perhaps the LV shareholders might contribute some of the £13.5bn being raised in the rights issue. It did not even remotely occur to me that the LV shareholders might be entitled to rights to buy Ordinary (i.e. full voting) Shares. This seems to me entirely illogical – you’d think they’d get more LV shares instead – but is in fact the case.

Lloyds’ Prospectus notes that:

“Number of Limited Voting Shares in issue as at the date of this document 78,947,368 [D]

Number of Limited Voting Shares to be issued pursuant to the LVS Capitalisation Issue 1,973,683 [E]”

And this is what the Prospectus has to say about the Capitalisation Issue (the award of additional shares to existing shareholders, similar to a scrip dividend, though feel free to shout me down on this) in the Glossary:

“LVS Capitalisation Issue: the proposed issue of new Limited Voting Shares pursuant to Article 122 of the Articles”

My dedication to the task has reached its limits. At least until I get a second wind, I will not be trying to find “Article 122 of the Articles”. (Isn’t this legalese gone mad? Shouldn’t that just be “Article 122″? Or next time I tell someone my address should I say “number 47 of the numbers”?).

Anyway, if you add D + E to B and then multiply by A, you do indeed get C, to the nearest share.

I mentioned the possibility of rounding yesterday, i.e. that shareholders would not in general be entitled to a whole number of rights. I presume, since no allowance is being made for this, that such rights are being created and will be sold in the market. Perhaps shareholders will receive a small amount for the sale of part of a right they were entitled to; perhaps they won’t. I’ll let you know if I find out.

I hope that clears the typo issue up. Sorry, Lloyds, though I still think you calculated the TERP differently to how you said you would, and indeed, as I’ll explain next time, I still think you’ve taken liberties with the TERP concept. As I said before, and will elaborate, the one true TERP is that based on the closing price just before the shares go ex-rights, that is, on tomorrow’s closing price.

And if that isn’t a teaser for the next post, I don’t know what is!

This blog has been consistent in its criticism of Brown’s bank bailouts.

But at least most were open. We now learn that taxpayers’ money was used to bail out, secretly, the HBOS and Lloyds merger, deceiving shareholders.

Concealment is ok where it is reasonable and outweighs the alternative – the greater of two evils.

But deception is wrong and, like Bliar’s Iraq lies, it is becoming a hallmark of this disgusting Government. Time to call it a day, Mr Brown.

It has emerged that in October and November 2008 the Bank of England, as lender of last resort, made loans of £61.6 billion available to Royal Bank of Scotland and HBOS, to prevent their collapse. Of that, £25.4 billion went to HBOS.

The media are concentrating on the implications for how close the system was to collapse at that time. Clearly, to act as lender of last resort is absolutely legitimate and one of the Bank of England’s key roles. Given the state these banks were in, it was entirely appropriate for the Bank of England to provide those loans. It was also probably entirely appropriate to keep the loans secret, to prevent a run on the banks that might have been catastrophic.

What came after was entirely less appropriate, however.

At that time, Lloyds TSB was in advanced talks to buy HBOS. There have been suggestions that the Treasury, the Financial Services Authority, and even the Prime Minister himself encouraged Lloyds TSB to take on HBOS.

The Lloyds TSB shareholders voted on the takeover by HBOS on 19th November, and they approved the takeover.

It was clear even then that HBOS was in serious trouble, and this was a rescue bid by Lloyds TSB. However, those “lender of last resort” loans by the Bank of England were at that time secret. Crucially, they were not disclosed to the Lloyds shareholders as they approved the deal.

It is therefore clear that material facts were withheld from the Lloyds shareholders. Indeed, the circular issued to shareholders of Lloyds TSB, produced on 3rd November, says:

“Save for the £4 billion net cash proceeds raised by HBOS in its rights issue in July 2008 and as disclosed in the sections headed ‘Group Overview’, ‘Divisional Review’ and ‘Outlook’ in Part XIII (‘‘HBOS Interim Management Statement 3 November 2008’’) of this document, which sets out the current trading, trends and prospects of the HBOS Group, there has been no significant change in the financial or trading position of the HBOS Group since 30 June 2008, the date to which HBOS’s last published interim financial information (which is set out in Part IX (‘‘Historical financial information relating to HBOS plc’’) of this document) was prepared.”

We do not know, of course, whether the Lloyds directors knew of these loans. If they did, then they misled their shareholders.

If the Lloyds directors were not told about the loans, then a signficant part of the HBOS accounts was being hidden from the potential purchasers – in which case, it was the government that was misleading the Lloyds shareholders.

If the Lloyds shareholders had known about these loans, it might have made a difference to their decision to back the deal.

The media are saying that those shareholders might feel aggrieved at being misled in this way. The BBC, for example, say that “shareholders might be unhappy at not being told earlier”.

Let’s be clear. It is much more significant than that. It is now evident that Lloyds has been hobbled by the takeover of HBOS. Therefore, shareholders have lost money as a result of the deal. If those Lloyds shareholders were misled about such a major part of the deal, then they have clear grounds to sue. This could get interesting.

I don’t believe this – another discrepancy!

Not only have Lloyds apparently managed to put a typo in their rights issue announcement and seem to have based their TERP calculation on the closing price of the shares yesterday and not their average price, they also seem to have calculated the TERP on the basis of raising £13.5bn and not the £13bn I used. Since the rights issue is costing the bank £500m (see Prospectus), my logic was that £500m has to be subtracted from the amount raised.

Lloyds claim:

“Discount of Issue Price to theoretical ex-rights price based on the Closing Price on 23 November 2009 ….. 38.6 per cent.”

We can reproduce their calculation, based on last night’s closing share price of 91.47p.

Total value of bank after rights issue/no. of shares after rights issue = £((0.9147 * 27,161,682,366) + 13,506,882,774)/(27,161,682,366 + 36,505,088,579)) = £(38351673634/63666770945) = ~60.238p.

Discount = (60.238 – 37)/60.238 = 38.58% i.e. the 38.6% stated.

But perhaps we should knock off the £500m cost of the rights issue:

Now we get a TERP of £(37851673634/63666770945) = 59.453p.

Discount = (59.453 – 37)/59.453 = 37.77%.

I presume the argument for doing the calculation the way Lloyds have is that the cost of the rights issue is in the share price already. The trouble is you could only really say this if you consider it 100% certain the rights issue will go ahead. To be fair, it’s probably not far off 100% since it’s very unlikely that the shareholders’ meeting on Thursday will vote down the rights issue. And if they did, this would in itself undermine the share price…

So perhaps the basis for the TERP calculation should be the price just before the rights issue was announced. But this would presume the rights issue was a complete surprise, which it wasn’t.

Then there are other aspects of the fund-raising that materially affect the share price: the £2.5bn fee to HMT to avoid the Asset Protection Scheme which was the alternative and the issue of “CoCos” that is part of the same restructuring exercise (and the success of which has given Lloyds shares a bit of a boost today).

So I suppose, on reflection, I will go along with the way Lloyds have done the TERP calculation and their figure of a 38.6% discount, based on last night’s closing price. The implication is that my original calculation of the rights issue price gave a figure that was slightly too low.

My main point is that it should be normal for rights issues to be heavily discounted. The share price of companies raising funds via rights issues can be volatile:

Lloyds share price over last 3 months

The difficulty in pinning down the share price that should be put into the calculation leads to a certain slipperiness in the basis for calculating the TERP – maybe the T for “theoretical” is the operative word – and suggests caution should be the name of the game in setting a rights issue price. But Lloyds is being very cautious.

Afterthought (13:45): The “slipperiness” is in calculating the TERP in advance. The TERP is only a valid measure once the rights issue is 100% certain to proceed. In the case of Lloyds we can only really say what the TERP and the rights issue discount to TERP is, based on Thursday’s closing price, just before the rights are created, and after the meeting to approve the rights issue. At this point everything is certain, and, in particular, the fees for the rights issue are committed, so the full amount raised by the rights issue should be included in the calculation (as Lloyds did it). So we (Lloyds, professional commentators and myself) are all mistaken in trying to determine a TERP until the rights issue is definite. At best the figures we’ve all been discussing are just (educated) guesses.

In my earlier post, I expressed some bafflement that LLoyds say:

“Basis of Rights Issue 1.34 New Shares for every 1 Existing Ordinary Share”

since if you divide the number of new shares to be issued by the number of existing shares you get 1.34399. Suspicious those 9s, aren’t they?

I now suspect that what Lloyds meant to say was 1.344 new shares for each existing share. This would result in 36,505,301,100 new shares, 200,000 odd above the 36,505,088,579 stated. This is much closer to what would be expected since there will be some rounding down of the number of rights as 1.344 times the number of existing shares will not in general be a whole number. (Perhaps Lloyds had the data on shareholdings to calculate the number of new shares exactly).

If I’m right, the cash you need to find is 1.344 * 37p = per share or 49.728p, closer to what I was expecting than 1.34 * 37p which is only 49.58p.

Confidence-inspiring, eh?

[Note 16:40, 25/11: It turns out this isn't a typo - there's a different reason for the discrepancy].

I made a confident prediction yesterday that Lloyds would price its rights issue at 33.13p.

In fact the rights are being priced at 37p.

How and why did Lloyds arrive at this price?

I first saw a calculator on Tomorrow’s World when it was so valuable it had to be guarded. The programme claimed that such devices would eventually cost less than £5. Everyone scoffed. Of course they understated their case. Today I have a calculator included in my PC at an additional cost to me of effectively nothing – if it didn’t exist I’m sure I could download some freeware.

So, luckily I can easily check Lloyds’ figures.

First off, let’s see what’s accurate and what isn’t.

The various reports e.g. on Yahoo! are traceable back to this statement from Lloyds.

1. 37p is accurate

Lloyds provide the following data:

Number of Ordinary Shares to be issued by Lloyds Banking Group pursuant to the Rights Issue…. 36,505,088,579

Expected gross proceeds of the Rights Issue receivable by Lloyds Banking Group…. £13,506,882,774

The proceeds divided by the number of new shares to be issued is precisely 37p.

2. 1.34 is not accurate

Lloyds provide the following data:

Number of Ordinary Shares in issue as at the date of this announcement… 27,161,682,366

Number of Ordinary Shares to be issued by Lloyds Banking Group pursuant to the Rights Issue…. 36,505,088,579

The number of new shares divided by the number of existing shares is in fact 1.3439921757…

I confess myself slightly baffled, since I can’t find a more detailed statement from Lloyds.

Is there a rounding error? But to issue more shares than implied by the 1.34 entitlement per existing share would imply rounding the millions of small shareholders’ entitlements up, whereas I would expect the number to be rounded down (you can’t have part of a right).

3. What is the discount to TERP?

The 3rd November Prospectus defined the TERP as follows (p.240):

“Theoretical Ex-Rights Price or TERP:

the theoretical ex-rights price of an Existing Ordinary Share calculated by reference to the volume weighted average price on the London Stock Exchange’s main market for listed securities of an Existing Ordinary Share on 23 November 2009″ [my stress]

Today’s statement says this:

“The Issue Price represents a discount of 59.5 per cent. to the Closing Price of the Company’s Ordinary Shares on 23 November 2009 (being the latest practicable date prior to the publication of this announcement) and a discount of 38.6 per cent. to the theoretical ex-rights price based on this Closing Price.” [my stress]

Yahoo! gives yesterday’s closing price as 91.47p, but, as can be seen from the graph in my post yesterday, it seems “the volume weighted average price” of Lloyds shares yesterday must have been maybe 90.7p.

At 90.7p, the total value of the existing shares is (27,161,682,366 * 0.907) = £24,635,645,906.
Add in the £13bn net being raised and divide by total number of shares after the rights issue (all in millions): £37,636/(27,162+36,505) gives TERP = 59.11p.
37/59.11 = 0.626, so on this basis the discount to TERP is only 37.4%, outside the range they gave of 38-42%.

Why 37p, then?

It seems Lloyds have been very bullish on the rights issue price.

Maybe they’re right – the shares right now are trading up more than another penny at 92.73p, according to Yahoo!

But a company’s share price is an arbitrary value. What matters is how many shares you have multiplied by the share price.

It seems to me that it is in shareholders’ interest to price rights issues as low as possible. This makes it much less likely that a rights issue will fail, because the rights will have more value. This in turn will reduce the underwriting fee. As I pointed out a while back, the underwriting fee is not a trivial sum.

I can only explain a desire to price the rights at a higher price than necessary in psychological terms – macho posturing, perhaps.

I still don’t expect this to happen in the case of this rights issue by Lloyds, but the risk is that the normal effects of trading I described yesterday depress the share price and hence the rights price so much that the rights become effectively an option to buy the shares. Shorting the stock (and buying the rights) then becomes an attractive trade, since, if the rights issue fails, the new shares that would have been bought in the rights issue have to be sold in the market by the under-writers. This depresses the price further, added to the speculators’ profits. Of course, it also undermines confidence in the company itself, further depressing the share price…

The reason this won’t happen with Lloyds is I don’t believe the issue is so much underwritten as that commitments to take up rights have been obtained from the holders of the majority of the shares (possibly of a large majority). I suspect Darling’s 43% (discussed previously) is not the whole story.

I wasn’t expecting a twist in the story quite so soon! Let’s hope everything goes smoothly…

1. Lloyds announce $22 billion record rights deal. Lloyds has more shareholders than any listed entity in the UK. Stock trades up.

2. Unbeknown to some the B-share market in China got an absolute roasting today. Shanghai B-shares are down over 7% in one day. Keep an eye on this, volatility in the B-shares is not going away.

3. My Chinese analyst used to tell me: “Jon, there is an old saying in China, sometimes you need to kill a monkey to show to the chickens”. Phrases like this intrigue me because they shape society as much as they describe it. Anyway, remember the Melamine Milk scandal in China last year where many children got sick (6 died) as a result of contaminated milk? Two people involved in the scandal were executed by the Chinese Government today.

The Lloyds rights issue price is to be announced in less than 9 hours, at 7am tomorrow (Tues 24th). I can barely contain my excitement!

Lloyds has been trading at between 90 and 91p today, the reference day for calculation of the theoretical ex-rights price (TERP):

Lloyds share price 23/11/09

I based my calculations on a share price of 90p which gave a TERP of ~55p and a rights issue price of ~33p. I’m pleased to see the Observer agrees, though I do worry who their “analysts” are. If they’ve merely found my blog (and it’s happened before) then their support is rather circular. I noticed, though, that Joseph Dickerson at Execution has been quoted as expecting “a rights in a 30-35p range”, which gives me rather more confidence that I haven’t done something silly.

I’m therefore going to stick my neck out and predict a rights issue price of 33.13p [see Note]. How do I arrive at this? Simple: it’s 3 rights for every 2 shares which is such a simple multiple that I expect Lloyds to be unable to resist it. Remember, we have to put in around 49.7p per share we currently hold. 2*49.7 is 99.4, divided by 3 is 33.13 to two decimal places.

What will happen to Lloyds share price then, though?

We’re coming up to the interesting part of the exercise, and I’ll be watching like a hawk.

My prediction is this:
1. Lloyds will start trading at 55p [see Note] immediately the market opens on Friday morning (when the rights are created and the shares go ex-rights).
2. The rights will start to fall from their value of 21.87p (55p – 33.13p) as some rights are sold in the market by those who simply do not have the cash to take up their entitlement.
3. The shares are dragged down, as arbitrageurs (hedge funds, say) buy rights and sell shares (or short the shares), knowing that they can exercise the rights and make a profit.
4. Other market participants with money to invest in Lloyds exploit the undervalued stock, and buy both the rights and the shares, pushing the shares back up towards 55p.

In other words, I expect supply and demand to depress Lloyds shares below the TERP over the fortnight or so before the rights issue closes. How far the shares fall is the proverbial million-dollar question. I doubt very much the shares will drop as far as 33p, but the natural depression of the price during a rights issue makes it very difficult to use this method of raising capital in a crisis, as we saw last year.

It’ll be very interesting to see how much the tendency of Lloyds shares to drop in price is counteracted by those who see the rights issue as a buying opportunity…

I’ll be keeping an eye on things. Watch this space!

[Note (18:45 24/11): Lloyds have actually priced the rights issue at 37p, implying a "TERP" of ~60.24p. This is based on the closing price yesterday, 23rd, but the shares would be expected to start trading on 27th, when they go ex-rights, at a true TERP based on the closing price the previous day, 26th.

The reasons for the difference between the actual rights price and "TERP" and my estimates for these, above, are discussed in a Note to my previous post on this topic].

While covering an editorial assignment last week, I had very little time to photograph Master Sommelier Gerard Basset at his hotel.  We needed a simple but classy looking portrait to feature in Lloyds magazine.

So,  because of the limited amount of time and the lack of a studio I had to improvise.  Easy right?

I brought along a piece of A1 black card, which I had my assistant to hold, placed behind a chair where Gerard was to sit. Right behind the chair I placed a strobe with a red gel pointing up at the card behind Gerard’s head. As for the main light, I had a strobe firing through a shoot through umbrella positioned 45 degrees off to the right. This all took less than one minute to set up.

Now who said you need  a 20×20ft backdrop and half a day?

I see that this week’s Guardian Money letters page includes the clarification that, as I’ve also pointed out, the Lloyds rights issue does amount to “about 50p for each current share”.

The Guardian also publishes a letter (sorry, the online version of their letters page has no internal links, so you’ll have to scroll down), noting how the Equitable Life “was operating a Ponzi scheme under the very noses of the regulators”. I couldn’t have, and, in fact, didn’t put it better myself.

Hey, here’s an idea. If Guardian Money doesn’t really know what it’s talking about, why don’t they simply list issues in the news, inviting correspondence for publication the next weekend? It’d save on journo costs. I doubt the other papers are any better – I’m picking on the Guardian because that’s the paper I take, so really, guys, this is all a vote of confidence!

Anyway, about this 50p.

Late last Thursday, I think it was, I thought I’d check the exact amount due in the rights issue per current Lloyds share held. And I found that the shares are being sold a little cheaper to the Treasury.

The reason I checked is that there are (at least) two slight complicating factors in the Prospectus.

First, I noticed that:

“Ordinary Shareholders in the United States or any other Restricted Jurisdiction will, in any event, not be able to participate in the Rights Issue.” (section 3.2, p.32).

If such shares didn’t qualify for rights (which is not what’s stated, though is not excluded by the statement), then obviously the rest of us would have to put in a bit more to raise the £13.5bn. But one would imagine the rights would end up being sold in the market, which is what p.77 of the Prospectus seems to say (Section 15: “What should I do if I live outside the UK?”). So shareholders in Restricted Jurisdictions shouldn’t be a problem.

Second, there are a small number of Limited Voting (LV) shares – 79 million, compared to over 27bn – in fact ~27,162 million – Ordinary Shares. These LV shares also have an entitlement to rights. What I don’t know, though, is how much these LV shares are worth. If each is worth much more than an Ordinary Share, and, more to the point, if the holder of each contributes significantly more than 50p to the rights issue, then the rest of us would have to put in a bit less than 50p.

On the other hand, the Prospectus clearly states that they will issue up to 90 billion Ordinary Shares. The lowest price the new shares could be issued for is 15p, and 90bn * 15p is precisely £13.5bn.

So it seems the £13.5bn is indeed being divided equally amongst the 27bn shares – 27,161,682,366 to be exact – so shareholders will have to put in 49.70p, to 2 decimal places.

Nevertheless, I thought of another way of checking the 50p figure. I realised it was possible to work out how much the Treasury is paying for new shares in the Rights Issue. Their press release on the topic notes they’ll be “investing £5.7bn net of an underwriting fee”.

According to the Prospectus (p.104), the taxpayer currently owns 43.43% of Lloyds’ Ordinary Shares (the Treasury press release gives 43%, which is disappointingly imprecise).

43.43% of the shares comes to 11.8bn – 11,796,318,652 to be as precise as we can.

£5.7bn divided by the number of shares the Treasury holds, comes to 48.32p, not 49.7p.

My first thought was that, since the proportion of shares owned by the Treasury was rounded to 43%, perhaps the £5.7bn is a rounded figure too. But even if the real figure was £5.7999999bn, that would only be 49.17p a share, significantly less than our 49.70p.

In fact, as the holder of 43.43% of the shares, the Treasury should be putting in £5.86305bn, not “£5.7bn”.

Then I paid attention to the words after the figure £5.7bn in the press release: “net of an underwriting fee” [my stress].

Yes, what appears to be happening is that the Treasury is underwriting its own share purchase!

And, sure enough, the Prospectus has this to say (p.216):

“7.2 HMT Undertaking to Subscribe

Under the HMT Undertaking to Subscribe, subject to certain terms and conditions, including that the Resolutions relating to the Rights Issue and the HMT Transactions are passed, HM Treasury has irrevocably undertaken to procure that the Solicitor for the Affairs of Her Majesty’s Treasury (as nominee for HM Treasury) (i) votes in favour of all of the Resolutions in accordance with the recommendation of the Board (except for Resolution 4, as set out in the notice of General Meeting, regarding the HMT Transaction) and (ii) takes up its rights to subscribe for all of the New Shares to which it is entitled under the Rights Issue, at or prior to 11.00 a.m. on 11 December 2009, each at the Issue Price. Conditional upon (ii) above, the approval of Resolution 4 by the Ordinary Shareholders and the receipt by the Company of the aggregate subscription proceeds payable by HM Treasury (the ‘‘HMT Subscription Proceeds’’), the Company has agreed to pay to HM Treasury (or to such other person as HM Treasury may direct) the HMT Commitment Commission, being a fee equal to: (A) the Base Fee multiplied by the aggregate number of New Shares for which it has subscribed, plus (B) the Per Share Discretionary Fee multiplied by the aggregate number of New Shares for which HM Treasury has subscribed, in consideration, amongst other things, for the undertakings given by HM Treasury in the HMT Undertaking to Subscribe. The HMT Undertaking to Subscribe contains certain representations and warranties and indemnity provisions in favour of HM Treasury which are the same as those given in favour of the Banks (and certain other indemnified persons) under the Rights Issue Underwriting Agreement.” [my stress].

Remember that £13.5bn? Well, as I had to allow for in calculating the “TERP”, only £13bn of it goes to Lloyds.

If we calculate how much the government is paying on a basis of the total rights issue being £13bn and not £13.5bn then 43.43% is £5.6459 which is much closer to £5.7bn. Not all of the £500m will be the underwriting fee. If the Treasury is putting in exactly £5.7bn (and owns exactly 43.43% of the shares), then that implies the issue will raise £13.12bn (rounded) including arrangement fees, but net of underwriting costs. The latter therefore come to around £388m. Shocking.

My understanding is that in fact this little perk is not special to this rights issue, nor to HM Treasury. Large shareholders are routinely underwriting their own subscriptions to share issues.

Now, all this really represents is an early commitment to subscribe to the issue.

Let’s just consider how much this is worth. The issue will be at a ~40% discount to the TERP, as discussed last time. As we saw, the TERP will be around 55p, and the new shares issued at ~33p.

Is there any real chance of the share price falling below 33p before the completion of the rights issue?

Not really. Cyclone Lehman has passed through the markets and all is now calm. Lloyds raised £4bn at 38p a share back in April, when the recession and its own position looked much worse than it does now.

More to the point, would I have taken the same deal as HMT to save my share of the £388m? Yes, I would.

Before Darling got his feet under the desk at Number 11, there was a principle that shareholders were protected by “pre-emption rights”, that is, existing shareholders had to be offered the same deal offered to new shareholders. Similarly, the interests of minority shareholders are supposed to be protected from the big guys. Now, an ignorant media (and Vince Cable) eggs on the government to act exclusively in the interests of “the taxpayer”. In fact, companies must be run in the interests of all shareholders. That’s why they are legal entities. In using its stakes in the banks to impose stealth taxes on the organisations, the Treasury is dangerously close to indulging in the same sort of behaviour that put Conrad Black behind bars.

Mr Darling, might I perhaps have the temerity to suggest that, rather than whinging about bankers’ bonuses, a better strategy would be to examine some of the ways in which business insiders make massive amounts of easy money at the expense of, very often, the private shareholder, among others? And underwriting rights issues isn’t even the worst offence. Start by looking at the bankruptcy process – e.g. Telewest, Cobra Beer, Jessops and Woolworths and list the winners and losers…

There is a massive conflict of interest if large shareholders receive underwriting fees for rights issues. I have no idea whether £388m is an objectively reasonable figure or not. But I do know two things:
1. The holders of large blocks of shares who also act as underwriters – including the Treasury in this case – have no incentive to question the underwriting fee.
2. I wasn’t offered the chance to underwrite my own share purchase – i.e. commit a few weeks early – which I would quite happily have done. I’d have liked a “Commitment Commission” too, Mr Darling.

Small shareholders can work out how much the under-writing will cost them: it’s £(~388m * no. of current shares)/total number of shares i.e. ~27bn, a bit over 1.4p per share or ~£14 per 1,000 shares. Adds up, doesn’t it?

No wonder investment bankers are rolling in money when the Treasury – far from ensuring fair play – is happy to be complicit in yet another systematic mugging of Joe shareholder.

And what’s more, it’s not difficult to think of better ways of carrying out rights issues.

(CFD.net.au – Contract for Difference, Share, Forex, ETFs, Commodities Traders) –

October 9, 2009

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(CFD.net.au – Contract for Difference, Share, Forex, ETFs, Commodities Traders) –

October 9, 2009

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This is my third post on the topic of Lloyds upcoming rights issue. My aim is to provide a little clarification for those affected. Why am I doing this? Despite everything, I still believe in a “share-owning democracy”.

The Guardian’s Patrick Collinson wrote this recently:

“An equitable figurehead

In recruiting Honor Blackman as a Joanna Lumley-esque figurehead, the Equitable Members Action Group has chosen well. With-profits annuitants such as Blackman, who had no choice but to stay with Equitable, have suffered more than any other category of policyholder. The others were given a choice in 2000 to get out with a 10% cut in policy values. Those that didn’t take it want compensation galore instead. Are they really that deserving of taxpayer money?” [my stress]

Maybe I’m a bear of little brain, but the Equitable Life non-GAR with-profits policy-holders have had a large chunk of their assets arbitrarily confiscated – a court put the rights of GAR holders above theirs. If this doesn’t deserve compensation, I don’t know what does. More another time.

The lesson I take from this is that you’d better look after your own finances because you can’t trust the media to look out for you when the pros screw up.

When Lloyds announced their upcoming rights issue my initial reaction was to whinge about the complexity of “deferred shares”, which I concluded are worthless, just a device to get round some stupid rule.

I also noted on that first post and subsequently that you can determine how much cash you’ll need to take up your rights. You’re going to need ~50p per share you hold going into the rights issue.

I have no idea why Lloyds didn’t spell out in the various documents they’ve issued about the rights issue that you’ll need to find ~50p per existing share to take up your entitlement to new shares. If I may be permitted to give them some feedback as a shareholder, my opinion is that it would have been a good idea to specifically include the amount of money shareholders would need to find. Perhaps those involved and the officers of any other company doing something similar in future could bear this point in mind.

In my second post on the subject I also presented the argument that a rights issue can temporarily depress a company’s share price so might be a good time to buy shares either by subscribing to the issue or otherwise. [Nothing I write on this blog should be taken as financial advice].

From the search terms that are being used to reach this blog, there are two other significant areas of confusion: the timetable and the use of the term “theoretical ex-rights price” (TERP) to determine the issue price of the new shares.

Timetable

As I understand it, for the retail investor there are only 3 key dates and the first of these appears to be another anachronism (this whole process could do with a bit of simplification):

- 20th November (Friday): the “Record Date” for entitlement to receive rights. If you’re planning to buy shares near or after this date, then, if I were you, I’d check with a financial adviser or stockbroker as to whether the deal will be in time to qualify and whether there’ll be any extra bureaucratic hassle. The Prospectus says this:

“7 If I buy Ordinary Shares after the Record Date will I be eligible to participate in the Rights Issue?
If you bought [sic] Ordinary Shares after the Record Date but prior to 8.00 a.m. on 27 November 2009 (the time when the Existing Ordinary Shares are expected to start trading ex-rights on the London Stock Exchange), you may be eligible to participate in the Rights Issue.
If you are in any doubt, please consult your stockbroker, bank or other appropriate financial adviser, or whoever arranged your share purchase, to ensure you claim your entitlement.
If you buy Ordinary Shares at or after 8.00 a.m. on 27 November 2009, you will not be eligible to participate in the Rights Issue in respect of those Ordinary Shares.”

So what’s the point of the Record Date if it’s not a real deadline?

- 27th November (Friday), 8am: rights created and can be traded or exercised. This is when I’d expect them to appear in (online) nominee accounts.

- 11th December (Friday), 11am: rights must be exercised by this time, though if you have a nominee account they’ll probably advise you of a deadline earlier than this. The new shares can be traded from start of business on the Monday (14th December).

TERP

The Lloyds Prospectus (p.6) implies that the:

“…Issue Price [will] be set at a 38 per cent. to 42 per cent. discount to TERP…”

They also define the TERP as:

“the theoretical ex-rights price of an Existing Ordinary Share calculated by reference to the volume weighted average price on the London Stock Exchange’s main market for listed securities of an Existing Ordinary Share on 23 November 2009″.

Got that?

I thought I understood how to work out the TERP, but tried to check anyway. Wikipedia’s entry is little help. It doesn’t seem to me to contain any falsehood, but then it doesn’t provide a lot of information either.

Unfortunately, Wikipedia references something called Investopedia which has this to say:

“Although the stock price is not likely to change immediately following the new rights issue, it will change as the rights expiration date approaches.”

Rubbish. No wonder we’re all confused!

The whole point is that as soon as the existing shares are split into ex-rights shares and (nil-paid) rights (at 8am on 27th November in the case of Lloyds), the (ex-rights) share price adjusts – to the TERP – to reflect the split. The rights should theoretically trade at approximately the TERP minus the subscription price for each right (i.e. how much you have to pay to exercise the right). Once all the rights are exercised, which they will be, since rights issues are underwritten, the new shares will be identical to the existing shares and should trade at the TERP, plus or minus the effect of any changes in sentiment due to events after the start of the rights issue or just because sentiment changes.  I say “should” trade at the TERP, because there’s also the effect of the additional supply of shares, which may depress the share price below the TERP, as I discussed last time.

So what would we expect the TERP to be for Lloyds?

TERP Calculation

This is how I think the TERP should be calculated.

At present the shares are trading, handily, at exactly 90p. If we round down to 27 billion in circulation, Lloyds is currently worth £24.3bn.

The rights issue involves putting in more money (£13.5bn less £500m expenses) and creating more shares – we don’t know how many yet.

After the rights issue Lloyds should theoretically be worth £(24.3+13)bn = £37.3bn.

The TERP depends on how many new shares are created. For example, if the new shares are priced at 50p, there will be another 27bn. There will therefore be 54bn in circulation after the rights issue and each share would be worth £37.3/54 = ~69.1p.

In this case the rights would be expected to trade at around 19.1p.

If, in this example, the rights were trading at less than 19.1p or the shares at less than 69.1p after the start of the rights issue, then the implication is either Lloyds’ prospects have changed, or the rights issue has reduced the share price.

Lloyds say they want the rights price to be at a ~40% discount to the TERP. 50p is therefore too much (it’s more than 0.6*69.1p). You could iterate to an appropriate price but I expect they did some algebra:

No. of shares after issue = 27bn + 13.5bn/P (where P is the price of the rights issue)

TERP = (Share price before issue (known, let’s take this to be 90p, as now) * 27bn + £13bn) / no. shares after issue

P = 0.6 * TERP

Therefore, P/0.6 = £(24.3+13)/(27 + 13.5/P)

P (27 + £13.5/P) = £37.3*0.6

27P + £13.5 = £22.4

P = £(22.4 – 13.5)/27 = £8.9/27,  i.e. 33p.

and TERP = 33p/0.6 = 55p

Check: No. shares after issue = (27 + 13.5/0.33)bn = 67.9bn

TERP = £(37.3/67.9) = 55p

Easy, peasy! [But see Note below]

So, if Lloyds shares are trading at 90p on 23rd November (the date Lloyds is using for their calculation), I’d expect the the rights to be priced at around 33p (I’ve indulged in a little rounding, so let’s not try to be too accurate now) and the TERP will be around 55p.

It’s quite possible I’ve made a horrendous error (or even more than one).  If so, I’ll be happy to post a correction if someone points it out. [22:00 12/11: I've already corrected a small error I spotted myself!]

[Note (18:30 24/11): As discussed in a later post, Lloyds have actually gone for a rights price of 37p, implying a "TERP" of ~60.24p. The difference from my estimate is due to a number of factors:
- some rounding down on my part;
- my assumption of a 90p share price before the issue. Lloyds took the closing price of 91.47p on 23rd (even though they said they'd take the average share price that day);
- Lloyds priced the rights issue towards the bottom of the 38-42% range of discount to the "TERP" they'd announced - ~38.6% - whereas I assumed a 40% discount;
- I deducted the £500m in fees from the proceeds of the rights issue - this shouldn't really have been done (and has a significant effect, showing how much those fees are costing shareholders), but then again, the only true TERP is that calculated on the closing price just before the rights are created.]

Lloyds have announced today that they are going to cut a further 5,000 jobs, not the top brass or those collecting their massive Christmas bonuses, no it’s those that are seen as supplementary to requirement. Admittedly, some 2,400 of those jobs will be temporary staff but those are the age brackets and backgrounds that have been hit hardest by the rocketing numbers of unemployment. With the number of those seeking worker higher than in most peoples living memory the news of yet more cuts is certainly not going to be a welcome one with Christmas just round the corner.

Considering the fact that 43% of the Lloyds group is owned by the taxpayers many of them will feel betrayed knowing that many of the big bosses of the bank will be collecting ludicrous end of year sweeteners. All the various sectors are being effected with 940 jobs going from their insurance arm.

So, many more people will be searching the job columns now and even more will be concerned at the risk to their own jobs with the holiday season approaching and stockings needing filling.