Converting prefs

By THIS IS MONEY
Updated:

 

The Daily Mail City team explains what converting prefs is - switching from preference shares to ordinary shares.

Converting what?

Prefs, which are preference shares issued by the government to our ailing High Street banks.

Explain

In October Royal Bank of Scotland, HBOS and Lloyds were promised £37bn of state aid.

Controversially, Chancellor Alistair Darling and his team saddled the three with £9bn prefs paying a punitive 12% rate of interest.

Ouch!

There was much wailing and gnashing of teeth in the aftermath - particularly when the Americans, borrowing the best parts of UK bailout, loaded their banks with prefs yielding just 5%.

So what's happened?

RBS is converting its £5bn of prefs to ordinary shares. At a stroke it slashes £600m from its annual interest bill and frees up as much of £6bn of new capital that can be loaned to businesses in dire need of cash. But the taxpayer is left holding 70% of the Royal Bank, up from 58%.

What of Lloyds and HBOS?

The pair have merged into Lloyds Banking Group. Publicly, management of the giant 'Bank of Britain' are pledging to pay off their £4bn of prefs.

Analysts wonder where Lloyds will find the funds to do this, and predict the black horse bank will have to follow the lead set by RBS.

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