Is there method in Lloyds madness?

Bizarrely Lloyds Banking Group has bought back into one of the companies it sold when it unloaded the former HBOS integrated finance portfolio in a £480 million deal in 2010.


Graeme Shankland
Graeme Shankland

The Integrated Finance Division, headed by Graeme Shankland, one of HBOS Corporate Director Peter Cummings key lieutenants, operated one of the most controversial of the collapsed bank’s activities – structuring leveraged buyout deals and buying equity stakes as well as providing the debt.

The practice flew in the face of conventional banking wisdom since it threatened a conflict of interest between the bank as lender, which wants to get its depositors’ money back at any cost, and the shareholder, who wants to see the company preserved. It was heavily criticised by the Financial Services Authority in its final notice on Bank of Scotland last year.

HBOS equity stakes yielded big profits in the boom years, but these turned into heavy losses as the credit crash exposed the shallowness of many of the property-based investments. After its disastrous acquisition of HBOS, Lloyds sold the rump of the portfolio to Cavendish Square Partners, a joint venture with the private equity group Coller Capital. Lloyds received £332 million, but retained a 30 per cent stake. The portfolio had been valued at £1.4 billion in 2007.

Cavendish outsourced the managed disposal of the investments to Caird Capital, a limited liability partnership set up by Shankland and including several of his former HBOS colleagues. They have been slowly working their way through the 32 firms and have done very nicely out of it so far, having been paid fees by Cavendish of £12 million, enough to pay themselves decent salaries and a profit share. According to Caird’s last accounts partners’ drawings were £2.5 million and there was still £1 million in the bank.

Caird had some quick wins, the biggest being the sale of the oil services company PSN to the John Wood Group for $955 million and Vue Cinemas in a £450 million buyout. However, it is hard going. So far only seven companies have been sold and of the remaining 25 several, including the David Lloyd Leisure Group and builders Keepmoat, are having a tough time.

Of the disposals, one stands out. Bifold is a Manchester-based valve and pump maker, which serves the oil and gas industries worldwide. The company has done well and has good prospects, but a £80 million refinancing sees Lloyds Development Capital buying back the stake sold by its parent to Cavendish. It would be interesting to know whether LDC paid a premium to do this, but I don’t suppose we’ll find out.


2 responses to “Is there method in Lloyds madness?”

  1. i am doing a report on Keepmoat and I am interested to know why Llyods bought back shares in keepmoat and why they reduced their debt and turned it into equity?

    1. Ray Perman Avatar
      Ray Perman

      I don’t know the details of the Keepmoat situation and I doubt that Lloyds will tell us, but usually a bank reduces its outstanding debt, or swaps debt for equity, because it has no choice – the company is in trouble and calling in the debt will force it into liquidation. To try to retrieve something, the bank swaps the debt for equity. If the company survives the bank’s shares will be worth something even if it doesn’t get back the full amount of the loan. The losers, of course, are the existing shareholders, who are diluted by the new shares issued to the bank.