Nov. 11 (Bloomberg) -- Bank of America Merrill Lynch will exclude Lloyds Banking Group Plc’s contingent capital notes from its bond indexes because the debt can convert to equity, the second time it’s changed its mind on the securities.

Lloyds is offering holders of some junior notes the opportunity to swap into 7.5 billion pounds ($12.6 billion) of capital to protect against losses, including the so-called CoCos. The London-based lender is seeking to bolster capital to evade the U.K. government’s Asset Protection Scheme, which would cost 15.6 billion pounds in fees.

Merrill Lynch said on Nov. 4 that it wouldn’t include the notes in its bond indexes because of their equity conversion feature. On Nov. 9, the bank’s New York-based index group said some notes with conversion features were already in its benchmarks and that it would include the CoCos. On Nov. 10, the group changed its mind again, citing “the preponderance of feedback that we have received from investors who are measured against our indices.”

By including the bonds in its indexes, investors that use Merrill Lynch’s gauges as benchmarks would have been forced to hold the securities or find a substitute to mimic their performance. The mandates of managers of investment-grade bond funds typically don’t allow them to hold convertible bonds or equity.

Merrill Lynch spokeswoman Michelle Ryan in London declined to comment.

Barclays Capital, which bought the index business of Lehman Brothers Holdings Inc. when the U.S. bank collapsed, said it doesn’t plan to include the securities in its main bond indexes. The London-based firm said it plans to start an index of contingent capital securities “at a later date, subject to the full availability of necessary pricing and analytical data.”

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net

Last Updated: November 11, 2009 12:50 EST