Oct. 30 (Bloomberg) -- Lloyds Banking Group Plc is likely to get shareholder support for its plan to raise more than 11 billion pounds ($18 billion) in a rights offering and exit the government’s asset insurance program, according to investors.

The share sale to existing investors would be among the biggest in U.K. history, after HSBC Holdings Plc’s 12.5 billion- pound offering in April and Royal Bank of Scotland Plc’s 12.3 billion-pound sale in June 2008. The government owns 43 percent of London-based Lloyds and would increase its stake if investors reject the offering.

“Shareholders can see the advantages of not allowing the government to increase their stake to majority ownership,” said Robert Talbut, who helps manage 32 billion pounds, including Lloyds stock, at Royal London Asset Management Ltd. “Most people are minded to support the equity issue.”

Lloyds Chief Executive Officer Eric Daniels agreed in March to insure 260 billion pounds of the bank’s most toxic assets with the Treasury. He is in advanced talks to escape the plan because it would cost 15.6 billion pounds in fees and give the government a 62 percent stake in the lender.

“My instinct tells me they should be able to succeed in pulling off this capital-raising exercise,” said Chris White, who helps oversee 60 billion pounds at Threadneedle Asset Management Ltd. in London and owns Lloyds stock. “I think we would stand our corner but would want to see the terms.”

Lloyds may sell shares to investors for about 49 pence each, according to the median estimate from six analysts surveyed by Bloomberg. The estimates ranged from 35 pence a share to 65 pence. Lloyds rose 0.3 percent to 86.27 pence as of 3:09 p.m. in London trading.

Short Sellers

About 7.8 percent of Lloyds’ stock was on loan as of yesterday, indicating so-called short sellers expect its shares will fall, according to figures from Data Explorers. That’s an increase from around 1.34 percent of the banks shares being on loan at the beginning of this month.

In addition to the shares, Lloyds may sell 7 billion pounds of bonds that would convert into equity in the event that Lloyds’s Tier 1 capital dropped to distressed levels, as well as 2 billion pounds of mandatory convertibles, Credit Suisse Group AG analyst Jonathan Pierce said in a note to clients today.

“These are new instruments, so who are the new buyers?” White said. “There are questions we don’t know the answer to. It’s quite a lot of money to seek from bondholders.”

The Treasury plans to take up its rights to 43 percent of the offering, a person familiar with the situation said today. That would mean buying more than 4.7 billion pounds of stock, leaving Lloyds to raise the rest from other investors.

Discussions with Lloyds are continuing and no decision has been made, said a Treasury spokesman who declined to be identified.

Pressure on Daniels

Daniels, 58, faces pressure from some investors to quit after loan losses linked to his takeover of HBOS Plc left the bank in need of a 17 billion-pound government bailout.

Shareholders “would want change at the top as a price for the rights offer,” said John Smith, a fund manager at private bank Brown Shipley & Co. in Manchester. “There was a move to grow bigger without fully looking at all the risks.”

Daniels said in August that bad loan provisions peaked in the first-half.

“We are not overly impressed by their claim to have passed the peak of impairments, and I suspect they have not got to grips with it,” said Colin McLean, CEO of SVM Asset Management in Edinburgh, which manages 650 million pounds of stock including Lloyds shares. We are not entirely comfortable with coming out of APS. We probably won’t support it.”

To contact the reporter on this story: Jon Menon in London at jmenon1@bloomberg.netAndrew MacAskill in London at amacaskill@bloomberg.net

Last Updated: October 30, 2009 11:10 EDT