It has been rumoured for a while and now it's official - Lloyds is issuing contingent capital:

Lloyds Banking Group plc ('Lloyds Banking Group') today announces proposals intended to meet its current and long-term capital requirements which, if approved by shareholders, will mean that the Group will not participate in the Government Asset Protection Scheme ('GAPS').

• Fully underwritten Proposals to generate at least £21 billion of core capital1, comprising:
  • £13.5 billion rights issue. HM Treasury, advised by UKFI, has undertaken to subscribe in full for its 43 per cent entitlement
  • Exchange Offers to generate at least £7.5 billion of contingent core tier 1 and/or core tier 1 capital (core tier 1 capital capped at £1.5 billion)
• High quality, robust and efficient capital structure:
  • Immediate 230bps increase in core tier 1 capital ratio from 6.3 per cent to 8.6 per cent2
  • Significant contingent core tier 1 capital - equates to additional core tier 1 capital of 1.6 per cent3 if the Group's published core tier 1 capital ratio falls below 5 per cent
  • Reinforces the Group's capital ratios in stress conditions and meets FSA's stress test
  • Higher quality capital compared to GAPS where capital benefit reduces over time

The exchange offer is a way of addressing the burden-sharing demanded by the EC.

Offering documents seem to be available, but are not accessible since the world's regulators are protecting investors from news and foreign prospectuses are, generally, better protected than the Necronomicon. It is not clear - it never is - whether this protection is explicit, or whether they've introduced such a conflicting snarl of regulation that the issuers simply throw up their hands and refuse to take the chance.

However, it appears that there is a single conversion trigger based on published Tier 1 Capital Ratios, which I think is thoroughly insane. What happens if the rules for calculation of this ratio change? They're supposed to change! Treasury and BIS are working feverishly to change them! Does Lloyds have to maintain a calculation of ratios under today's rules? In that case, not only is there huge expense and confusion, but unintended effects when the trigger occurs under one set of rules but not another. If the rules do change in the interim, then investors are being asked to buy into a blind pool, which will make the securities even more risky than intended.