Lloyds Banking Group could have to pay more than £1 billion to avoid taxpayer-backed insurance for its toxic debts, it has been reported.
The bank – 43% Government-owned – is looking at ways to stay out of the Asset Protection Scheme (APS) and stop the taxpayer’s stake rising further.
Lloyds is attempting to raise £26 billion – including an £11 billion rights issue – to boost its balance sheet but the Treasury will still demand a break fee if it succeeds in avoiding the APS, the Daily Telegraph said.
It is thought that since Lloyds said in March that it would put £260 billion in bad loans into the scheme, it has enjoyed implicit insurance.
This means the European Commission would be likely to raise questions under competition and state aid rules if the Government allowed Lloyds to walk away without paying anything.
Under the current terms of its entry, it will pay £15.6 billion in new shares as a fee for the APS, taking the Government’s stake to 62%.
The figure could change if the bank reduces the amount of bad debts – mostly inherited from its rescue of struggling HBOS a year ago – it puts into the scheme.
Lloyds’ shares were down 3% on Tuesday and have lost more than 20% in the past four weeks since speculation over a rights issue began to gather pace.
A report in the Times suggested an £11 billion rights issue could generate more than £300 million for investment banks in underwriting fees – before the cost of further cash-raising moves such as converting bonds into ordinary share capital.
The bank reported a loss of £4 billion for the first half of the year and expects to make a loss for the full-year. Bad debts – mostly inherited from HBOS – jumped to £13.4 billion in the first six months of 2009.
With The Press Association