Fees are already scarce when it comes to government trades, but UK Financial Investments squeezed banks even further by banning them from charging buyside commissions on the £4.2bn selldown in Lloyds Banking Group. The move cost the banks about £6.2m, but the four bookrunners can now include Europe’s largest-ever accelerated bookbuild in their pitch books.
The four are also well positioned for an even larger sale to follow later this year. Preparations are already under way for a marketed follow-on in Lloyds that will include retail, again with UKFI selling down the state’s holding.
The UK’s first sale in Lloyds was last September, when banks charged no fees to UKFI but could charge commissions. UKFI took 25% of those commissions (£1.2m), but as the National Audit Office deemed these a frictional cost that reduced the price achieved (of 75p), they were excluded this time.
The absence of fees made it more difficult for banks to break into the syndicate as proposed economics make up 50% of UKFI’s methodology for ranking banks. As a further 25% is for previous work for UKFI, the three bookrunners from the previous sale, Bank of America Merrill Lynch, JP Morgan and UBS, were a shoo-in. The final 25% for insight and engagement saw Morgan Stanley break into the deal.
UKFI could cite the successful US$3.4bn sale by the Swedish government in Nordea last September (which was led by four banks) as a sensible precedent for adding an extra firm.
“It sounds wrong to say this, but it was a relatively simple trade”
UKFI has fewer windows in which to sell stock than most sellers as knowledge of the contents of the Budget, and other government plans that could impact on UK banks, in effect makes it a frequent insider. UKFI had been working on the sale for a month, and was free to launch once the Budget was delivered on March 19, bringing in banks a week before launch. JP Morgan advises UKFI on its sales but then switches to a bookrunning role, so Lazard provided independent advice on this trade. The adviser also works for free.
Keeping up
The trophy deal boosts the four banks in their efforts to keep up with Goldman Sachs and Deutsche Bank, as both had built enviable leads over their competitors in Europe in the first quarter. With US$1.7bn under their belts from this sale alone, UBS and JP Morgan leapfrogged Deutsche and the others are just behind the German firm. Goldman retains a 3.9% market share cushion at the top.
Getting on the deal was the hard part.
“It sounds wrong to say this, but it was a relatively simple trade,” said one head of syndicate involved. “People were waiting for this. US$7bn of demand in two hours shows they were prepared.”
Pricing came at 75.5p, a 4.6% discount to Tuesday’s close, showing progress since the last sale. The deal was marginally upsized from 7.5% of the company to 7.8% to offset the discount, a move that reduces the state holding to 24.9%.
The book of 250 lines was more than 50% fundamental demand and driven by UK and US investors. The top 20 investors were allocated more than 50% of the deal and the average ticket size was over £100m.
