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Amid all of the relief on yesterday’s news that Lloyds bank is pushing through with a 14 billion rights issue the company has woken up today to news that Moody’s, the credit rating agency, has downgraded Lloyd’s rating from C to C- and HBOS from C- to D+. This will obviously have an immediate impact upon the cost of finance for the enlarged group amid signs that the credit rating agencies believe the move to withdraw from the asset protection scheme offers more short-term risk to the company’s operations.

Even though the 13.7 billion to be raised from existing shareholders will be used to introduce a “buffer” between the company’s liabilities and financial needs, there is concern that if the economy takes a further downward lurch we could see a significant increase in the number of write-offs. Whether this will happen or not remains to be seen but the credit rating agencies need to take into account all possible scenarios when arriving at their final decision.

The likes of Lloyds bank and Royal Bank of Scotland have been on so called “credit watch” for some time so while today’s news is disappointing it would be wrong to suggest it was not wholly unexpected.

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