Hedge funds are staking hundreds of millions of pounds on Lloyds Banking Group shares falling, amid fears the market is being too optimistic about the imminent European competition ruling and the bank’s planned rights issue.
Traders have borrowed an estimated £1.5bn of shares, amounting to 50pc of the stock available to borrow, according to figures from Data Explorers. Dealers say some of the stock on loan has already been used to place “short positions”, while other borrowed shares are being held in preparation to short the stock as soon as Lloyds announces its rights issue.
Shares in Lloyds have dropped 10pc this week following the decision by the European Commission to break up ING, the Dutch financial services giant. In order to gain approval from European competition authorities for the state-backed bail-out it received during the financial crisis, ING is selling its insurance business, which is thought to be worth up to £14bn. Shares in ING fell nearly 20pc on the news of the sale.
The market has been expecting Neelie Kroes, the European competition commissioner, to rule that Lloyds should reduce its share of the current account market by 5pc.
However, in the wake of the decision on ING, traders now think the ruling could be tougher and even include a break-up.
The EC decision is expected in conjunction with the launch of a £25bn capital-raising by Lloyds. The bank hopes that a rights issue will help it to exit the Government’s asset protection scheme. However, traders are concerned that the market is too confident that shareholders, particularly the Government, will take up their rights.
Others have borrowed the stock to take advantage of the more complicated elements of the rights issue. William Duff Gordon, of Data Explorers, said: “Hedge funds have borrowed shares in anticipation of arbitrage opportunities between the share classes –they’re ready to go short when the details of the announcement come out.”
Laurie Pinto, a broker at North Square Capital, said: “We’re seeing an increase in short interest, driven by concerns over the rights issues and the quality of Lloyds’ assets. Also, the market hates uncertainty and the longer the EC takes to make the decision, the worse it gets. The ING example has worried people.”
By Louise Armitstead
Published: 9:55PM GMT 27 Oct 2009
Source: The Telegraph