Lloyds pays up for APS

Following on from the example set by RBS, Lloyds Banking Group last week finally confirmed that it had agreed terms with the UK government to participate in its Asset Protection Scheme, an insurance scheme whereby the government covers 90% of losses beyond a first-loss piece on a portfolio of assets.

At the same time, the bank also said it had agreed to swap some £4bn of preference shares held by the UK government with ordinary shares, taking the government’s stake in the bank to at least 60%.

The bank has agreed to take insurance through the APS on some £260bn par value of its assets, with an expected value of £250bn net of impairments and provisions, an average mark of 96%. This compares with the £325bn par value that RBS insured, marked at 93%.

The Lloyds pool of assets includes corporate and commercial loans that include commercial real estate and leveraged loans (£151bn).

However the scheme could have far-reaching consequences for debt restructurings.

“[The APS] definitely adds an extra layer of complexity to restructurings affected,” said Corinna Mitchell, a London-based partner at law firm Dechert.

Borrowers in restructuring talks, in particular, will need to be aware of the implications of the scheme, as their debt may have been insured through the scheme without their knowledge, Mitchell said.

“For borrowers, it will be difficult to know whether they are really talking to a bank or are in talks with the Treasury through the bank. Talking through an intermediary can work, but these cases will have a different dynamic than fronting banks acting for sub-participants,” she said.

Under the scheme an asset affected remains on a bank’s books but Treasury approval is required for any refinancing or restructuring proposal affecting it, and the Treasury has very broad discretion in how it responds.

And while a borrower could feel that it is negotiating with a bank on the economics of a deal, the Treasury is in a position to pursue a wider agenda, for example favouring certain borrowers or sectors.

“In a restructuring scenario, the Treasury may possibly take a different approach to a borrower with UK employees and assets than it does to a Continental deal, making it more difficult to predict how restructurings play out,” Mitchell said.