Lloyds Banking Group will pay £500 million in fees to ensure that its record-breaking £21 billion capital-raising plan is a success, it emerged yesterday.

The bank, which is 43 per cent-owned by the taxpayer, will pay a team of banks, led by Merrill Lynch, UBS, Citigroup, Goldman Sachs, JPMorgan Cazenove and HSBC, just over £187 million for agreeing to act as underwriters on a £13.5 billion rights issue, the biggest by a British company.

The bank will tap existing shareholders, including its 2.8 million-strong army of individual investors, for cash as part of a deal agreed with the Treasury to ensure that it can avoid joining the Government’s insurance scheme for troubled assets.

The Government, which has agreed to underwrite its portion of the cash call, will collect a fee of £143.7 million, after subscribing for £5.8 billion of new shares as part of yesterday’s deal.

The banks are charging a fee of 2.25 per cent to underwrite the rights offering, with a further 0.2 per cent payable to the joint bookrunners Merrill and UBS. The fees are substantially lower than the 3 per cent to 4 per cent that has become the norm, although Treasury insiders denied putting pressure on the underwriters to reduce charges.

The Treasury said that UKFI, the body in charge of managing the Government’s stakes in part-nationalised banks, had been involved in discussions with Lloyds about the terms of the capital-raising to ensure a fair deal for taxpayers.

A spokesman said: “This included discussions on the underwriters fees — although they are, of course, principally a matter for Lloyds and their underwriters.”

Lobby groups representing shareholders, who have been angry about the high charges on recent capital-raisings, claimed some credit for keeping the costs down. Peter Montagnon, director of investment affairs at the Association of British Insurers, whose members own 15 per cent of the stock market, said: “We are pleased to see that the fees are lower than on rights issues that we have seen recently.

“We made representations to those concerned on behalf of our members. We do believe that issuers should accept the responsiblity for ensuring that the fees they pay are reasonable.”

The lion’s share of the remaining £169 million in fees will be paid to the underwriters on £7.5 billion of contingent convertibles, or so-called CoCos, that Lloyds hopes to issue to its existing bondholders.

The CoCos consist of bonds with a life of at least ten years that will convert into equity only if Lloyds’s Tier 1 capital, a measure of its financial strength, falls below a specified level of 5 per cent.

The bonds pay additional rates of interest of between 1.5 per cent and 2.5 per cent. Lloyds hopes that existing bondholders will be keen to exchange their debt for the new securites because their interest payments cannot be stopped by the European Union.

Writing to each of Lloyds’ individual shareholders with details of the rights issue, which run to more than 240 pages, is expected to cost at least £5 million. Lloyds also must convene an emergency meeting of shareholders to vote on the capital plans. This side of the fundraising is expected to incur “several tens of millions” in additional costs.

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