Today, Lloyds Banking Group announced that it has agreed to participate in the U.K. government’s Asset Protection Scheme (Scheme) and that it has “agreed to replace the £4 billion of preference shares held by HM Treasury with new ordinary shares which will be offered to existing shareholders on a pre-emptive basis,” with the U.K. Treasury backstopping the offering. RBS committed to participate in the Scheme in conjunction with its introduction by the U.K. government, but Lloyds was unable to commit to the Scheme at that time. Lloyds intends to participate in the Scheme in respect of approximately £260 billion (or approximately £250 billion, net of December 2008 impairment provisions and writedowns) of assets and exposures, which are “expected to include residential mortgages (c.£74 billion), unsecured personal loans (c.£18 billion), corporate and commercial loans (including commercial real estate and leveraged finance loans) (c.£151 billion) and treasury assets (including the Group’s Alt-A portfolio) (c.£17 billion),” approximately 83% coming from the legacy HBOS portfolio. Lloyds will absorb the first £25 billion of losses on the portfolio and 10% of any further losses, with the U.K. Treasury absorbing the remaining 90%. To participate in the Scheme, Lloyds is paying the U.K. Treasury a £15.6 billion fee, amortizing over 7 years, which will be invested by the U.K. Treasury in newly issued B shares that will constitute Tier 1 capital for Lloyds. The B shares will be non-voting, will bear dividends at the greater of 7% or 125% of the rate of dividends paid on ordinary shares, will be convertible at the government's option into ordinary shares at a price of 115 pence and will be mandatorily convertible after the trading price exceeds 150 pence.
If existing shareholders do not subscribe for the newly issued ordinary shares, the U.K. Treasury's ownership would rise to 65% and, if all B shares were to convert to ordinary shares, its ownership would rise to 77%. However, the U.K. Treasury may not exercise its option to convert B shares if its ownership percentage would exceed 75% (but this limitation does not apply to mandatory conversion of the B shares). In any event, the government will not exercise more than 75% of the voting rights in Lloyds.
In participating in the Scheme, Lloyds has committed to "increase lending for the twelve-month period ending 1 March 2010 to creditworthy borrowers by a total of £14 billion – £3 billion for mortgage lending and £11 billion for business lending. A further £14 billion is committed for the twelve month period thereafter." Lloyds has also "pledged its support for various Government schemes designed to provide additional funding for small businesses."
Implementation of the Scheme and Lloyds' participation in it are subject to “regulatory, State Aid and shareholder approvals.”