Though spreads on Abbey National Bank benchmark issues tightened towards Lloyds TSB after Lloyds bid for the U.K. mortgage bank, last week's revelation of why the deal was referred to competition authorities will force spreads wider again, according to City players. Larissa Knepper, research analyst at Barclays Capital in London, says, "We've seen Abbey spreads converging close to Lloyds up until the referral [to the Competition Commission]. Since then spreads have remained static, but I believe Abbey spreads will drift wider in the next few weeks." The Office of Fair Trading revealed its rationale on Thursday for referring the merger to the Commission for examination, citing heavy consolidation in the area of current accounts. The deal is on hold until the investigation is concluded.
Another bulge-bracket analyst in London has a sell on Lloyds bonds because, even if it maintains its triple-A ratings after acquiring Abbey, it has indicated interest in acquiring other European banks. "In this case, it wouldn't be able to hang onto its ratings in the medium term," says the analyst. Lloyds benchmark issue is the 6.5% notes of '29 and has remained static around $181, while Abbey's 71Ž8% notes of '30 also hardly moved at $196.
Market pros point toward politicking as the reason the proposed $26 billion acquisition was referred to the Competition Commission, while last year's acquisition of NatWest by Royal Bank of Scotland wasn't investigated. "I'm wondering why the [OFT] is taking an interest now when they didn't examine last year's merger," says a bulge bracket analyst in London. The U.K. is poised for general elections in the spring, and a Lloyds-Abbey merger will mean job cuts and less consumer choice.
While Knepper is skeptical a merger will happen, other analysts believe Lloyds will limit job cuts or hold asset sales in order to ensure the merger. "[The Commission's investigation] is just a case of postponing the deal until after the election, not in eliminating it," says an analyst.