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Gov’t buy up £260bn Lloyds debt, takes 65% share

Lloyds Banking Group has submitted £260bn of debt to the Government’s Asset Protection Scheme as the Treasury takes a 65 per cent stake in the lender.

After a long-wrangled negotiation, the troubled lender has given up majority control in the Group in exchange for entrance into the scheme. It estimates that 83 per cent of the debt comes from the HBOS book.

The Group intends to participate in the Scheme in respect of assets and exposures on its balance sheet with an aggregate par value of approximately £260bn. The Covered Assets are expected to include around £74bn in residential mortgages, around £18bn in unsecured personal loans, as much as £151bn in corporate and commercial loans and around £17bn in treasury assets.

Lloyds Banking Group will bear a first loss £25bn of in respect of the covered Assets. After the first loss, the Group will retain an exposure of 10 per cent of any further losses incurred. The remaining 90 per cent of further losses arising in respect of the Covered Assets will be borne by the Treasury.

The scheme is costing the Group £15.6bn to enter into, which will be recouped by the Government over a seven-year period in the form of a share conversion scheme. If Shareholders do not claw back any entitlement to the new ordinary shares, the Government will own approximately 65 per cent of the ordinary shares of Lloyds. In addition, in the event of full conversion of the B shares that the Government is entitled to, then the Treasury’s aggregate ordinary shareholding would rise to 77 per cent.

Lloyds Banking Group chief executive Eric Daniels says: “Participating in the Government’s Asset Protection Scheme substantially reduces the risk profile of the Group’s balance sheet. Our significantly enhanced capital position will ensure that the Group can weather the severest of economic downturns and emerge strongly when the economy recovers. We believe that this is an appropriate deal for our shareholders.”

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