(Adds CEO comment, detail and background.)
By Patricia Kowsmann
Of DOW JONES NEWSWIRES
LONDON -(Dow Jones)- Lloyds Banking Group PLC (LYG) on Tuesday unveiled a long-awaited plan to raise GBP21 billion in capital, as it looks to escape the U.K. government's expensive asset protection scheme.
The bank, 43%-government owned, also said it will dispose of a total of 600 branches, representing a 4.6% current account market share and about 19% of its mortgage balances under European Union competition remedies.
Lloyds and Royal Bank of Scotland Group PLC (RBS) were among many European banks that needed government bailout amid one of the worst financial crisis on record.
In exchange for the help they received, they now have to fulfill requirements from the European Commission, which wants to make sure aided banks aren't in competitive advantage to those that stayed independent.
RBS disclosed Tuesday more-punitive measures from the EU, as it prepares to participate on the government's APS that will bring state ownership to 84%.
Lloyds said it will seek to raise GBP13.5 billion in a rights issue and GBP7.5 billion in an exchange of securities, including contingent-capital instruments.
The U.K. government has agreed to subscribe to enough shares to keep its stake at current levels, Lloyds said, adding that its Core Tier 1 capital ratio will rise to 8.6% from 6.3%.
"These proposals provide a significantly more attractive, market-based alternative to participating in [the asset protection scheme] and offer superior economic value to shareholders," Chairman Winfried Bischoff said.
"We believe that this represents a significant step toward meeting our, and the government’s, objective that the group operates as a wholly privately owned, self-supporting commercial enterprise," he added.
The bank said the issue price of the rights offer will be set before a general meeting with shareholders. At 0816 GMT, shares of Lloyds were up 2 pence, or 2.8%, at 87 pence.
The bank said under the securities exchange offer, holders can exchange their securities for bonds that will be converted into shares if the company's core Tier 1 ratio falls to below 5%.
Lloyds' capital-raising announcement came after weeks of speculation on whether it could avoid participating in the expensive insurance program launched by the government earlier this year to help banks get out of the financial crisis.
If all efforts disclosed Tuesday are successful, it said, it would be able to avoid the APS plan altogether.
The scheme was drawn up to ring-fence banks' bad assets, and Lloyds agreed to join in exchange for a fee and a larger government stake.
In Lloyds' case, the government would insure roughly GBP260 billion in risky assets for a fee of GBP15.6 billion, which would be paid in the form of nonvoting shares. The bank would also be responsible for a first loss of GBP25 billion.
Since it agreed on the insurance in March, however, market conditions have improved, and in September the bank said it was considering alternatives to the expensive scheme.
Lloyds said it will pay the Treasury a fee of GBP2.5 billion for the implicit APS support it has received until now. It has also agreed to reaffirm lending commitments with the government to March 2011.
Lloyds also said Tuesday that continued to deliver a good revenue performance in the third quarter on the lines of those delivered in the first half of the year.
It reiterated, though, that "we continue to expect the group to report a loss before tax for 2009, excluding the impact of the GBP11.2 billion credit relating to negative goodwill."
By not participating on the APS, the bank is escaping EU remedies in better shape than RBS, which earlier Tuesday said it will spin off its insurance arm and sell RBS branches in England and Wales as part of EU talks.
The Lloyds businesses being sold include the Cheltenham & Gloucester branch network, Lloyds TSB Scotland and Internet banking unit Intelligent Finance.
Under an EU agreement, it will sell GBP180 billion in noncore assets over time, and will also be forbidden from making certain acquisitions in the next three to four years.
-By Patricia Kowsmann, Dow Jones Newswires. Tel +44(0)207-842-9295, patricia.kowsmann@dowjones.com