Lloyds battles to keep Treasury at bay

David Hellier
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BACK in March when Lloyds Banking Group was first negotiating the terms of a deal to insure &pound;260bn of its most toxic assets, there were constant suggestions that chief executive Eric Daniels would resist anything that resulted in the government taking its 42 per cent stake in the bank to more than 50 per cent.<br /><br />According to the mood music at the time, the deal nearly fell apart on several occasions because of Daniels&rsquo; opposition to that aspect of it.<br /><br />In the end the deal that was agreed &ndash; but has not yet been signed &ndash; sees the government, courtesy of its banking arm UKFI, taking more than a 70 per cent stake in Lloyds, something viewed by some board members as humiliating. Yesterday shares in Lloyds fell four per cent as investors digested a continuous stream of reports suggesting the Lloyds board is once again fighting to extricate itself from the government&rsquo;s grip.<br /><br />Certainly conditions appear to be more propitious for those who want Lloyds to keep more of its independence. Shares in the bank have more than doubled since March even after yesterday&rsquo;s fall and the bank feels its experience of bad debts is &ldquo;over the worst&rdquo;.<br /><br />&ldquo;A lower government assets protection scheme participation (and therefore lower government ownership) in conjunction with an equity placing into what now appears to be a well underpinned market for bankshares should be well received,&rdquo; said Oriel Securities&rsquo; Mike Trippit yesterday.<br /><br />It all boils down to whether there&rsquo;s sufficient appetite for the &pound;10-15bn rights issue that would be needed to bolster capital ratios in the absence of a deal being done to insure the most toxic assets and one&rsquo;s perceptions of just how toxic the Lloyds loan book is.<br /><br />Reducing insurance to the majority of the loan book would put the bank at great risk of future losses if the economy turns down again. Possibly a compromise, in which the bank enters the scheme but not to the same degree as before, will be more appealing.<br /><br /><strong>ALL FRIENDS NOW</strong><br />The pursuit of Friends Provident, the insurance group founded to alleviate the hardship of Quaker families in 1832, appears to have come to a close with the likely acceptance of a &pound;1.85bn takeover bid from the insurance sector&rsquo;s upstart, Clive Cowdery&rsquo;s Resolution.<br /><br />Friends has for several weeks been averse to Cowdery&rsquo;s advances, accusing the Guernsey-based group of having a structure and governance that is &ldquo;totally inappropriate for a public company context.&rdquo;<br /><br />By yesterday, however, that stance changed, no doubt influenced by a dollup of extra value in the terms of Cowdery&rsquo;s offer. What a difference 0.8 of a Resolution share has made to those previously anything but friendly Friends board members (plus a cash sweetener that enables Friends&rsquo; retail investors to cash out).<br /><br />Whether Resolution makes concessions to accommodate its new partner&rsquo;s values about governance remains to be seen but in the meantime the deal can be viewed as a success for Cowdery and his acquisition vehicle. There will be more deals to come, of that there can be no doubt.<br /><br />david.hellier@cityam.com<br /><strong><br />&bull; Allister Heath is away</strong>