Lloyds Banking Group has announced plans to sell shares at 37p in the biggest rights issue seen in the UK.
A rights issue is when a company issues new shares offering them exclusively to existing shareholders at a fraction of the listed share price, in this case 59.5% lower than Monday’s closing price.
The share sale is hoped to raise £13.5bn, which would allow the bank to avoid having to take part in the government’s banking insurance scheme – a protection scheme that many feared could end up being a form of nationalisation by stealth.
Shares in the 43% government owned bank were up 1% in morning trading.
Lloyds, the UK’s biggest mortgage lender, will be issuing a total of 36.5 billion new shares, which is the equivalent to 1.34 new shares for every one that currently exists.
The sheer amount of new shares has caused concerns among shareholders regarding the value of each share after it was suggested that, like quantitative easing in the UK caused the value of the pound to fall, this would result in share value being diluted.
Robert Talbot from Royal London Asset Management said the fate of the group lies with the performance of the UK economy.
“I think it puts them into a much stronger capital position to be able to withstand whatever lies ahead. The crucial question facing the bank over the next two to three years is what happens to the UK economy,” he said.
Lloyds currently has 2.8 million shareholders, together with Britain’s largest number of private investors. A meeting for shareholders will take place in Birmingham on Thursday to approve the plan.
The share sale will cost the average shareholder £336.67. Existing shareholders are not obliged to buy new shares but failing to do so would cause their current share value to be diluted.
The rights issue is only one of Lloyds’ plans to raise around £22.5bn in total.
Lloyds currently holds a dominant position in both the personal and business banking markets, offering a range of current accounts and savings accounts, as well as mortgages.