Lloyds Banking Group Plc (LLOY)’s bonds jumped to a record after the part state-owned U.K. lender offered to buy back at least $3.25 billion of notes to reduce funding costs.
The 5.375 percent notes due 2019 issued by Lloyds TSB Bank Plc soared 2.14 pence to 117.24 pence on the pound, pushing the yield down to 2.63 percent, according to data compiled by Bloomberg at 4:45 p.m. in London. The bank’s bonds made up seven of the 10 biggest gains in Bank of America Merrill Lynch’s EMU Corporates Index.
The buyback, which London-based Lloyds said it’s planning with cash that “significantly exceeds its short term funding,” is its second since June and follows similar offers this month by Royal Bank of Scotland Group Plc and Barclays Plc. The tender comes on the busiest day for corporate bond sales in a week amid signs of an easing in the euro region’s debt crisis.
“Under pressure from markets and regulators, U.K. banks built up enormous piles of liquidity and they’re now able to deploy that buying back debt,” said Roger Francis, a credit analyst at Mizuho International Plc in London. “It’s positive for the price of the debt, which is being hoovered up by the bank and the market so as to become almost a scarce commodity.”
Debt issuance across Europe surged this month on optimism spurred by bond-buying programs from the European Central Bank and the Federal Reserve as well as Germany’s ratification of the euro-area bailout fund last week. Companies led by brewer AB Inbev NV and GE Capital Corp. sold 6.1 billion euros ($7.8 billion) of bonds today, the most since the eight-month high of l2.7 billion euros raised on Sept. 10, Bloomberg data show.
Lloyds said July 26 that it had a liquidity buffer of 105 billion pounds, more than double its money-market exposure maturing in less than one year. The lender boosted its core Tier 1 capital ratio, a measure of financial strength, to 11.3 percent in July from 10.8 percent at the end of last year.
The bank is offering a yield premium of at least 20 basis points to yesterday’s market prices across the tendered securities, Francis said. Lloyds said it will cap its acceptance of bonds denominated in euros, pounds, Canadian dollars and Swiss francs at 2 billion pounds ($3.25 billion.) It’s also offering to buy back bonds in U.S. and Australian dollars.
Credit-default swaps insuring Lloyds’ debt for five years rose seven basis points to 190 basis points from yesterday’s 16- month low of 184. The contracts had fallen from 360 basis points in June. A decline signals improvement in perceptions of credit quality.
Indexes measuring the cost of protecting European financial and corporate debt rose for a second day. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased six basis points to 195 and the subordinated index climbed six to 318. Lloyds is included in both benchmarks.
Contracts on the Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose two basis points to 123 basis points. The Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings climbed five basis points to 473.
Swaps on BAE Systems Plc, which is included in that measure, dropped 15 basis points to 98, the lowest since Jan. 2011 and the biggest decline since May 2010 amid negotiations over a merger with European Aeronautic, Defence & Space Co.
The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose three basis points to 176. Swaps on Spain jumped 18 basis points to 373 and Italy rose 13 to 332, while Ireland fell 11.5 to 279.5, the lowest since August 2010.
Rising yields may force Spain to seek assistance and submit to European Central Bank conditions for aid, ECB Governing Council member Luc Coene said yesterday. The country will consider a rescue to cut borrowing costs if the conditions are acceptable, Spanish Deputy Prime Minister Soraya Saenz de Santamaria said today.
A basis point on a credit-default swap protecting 10 million euros ($13.1 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
To contact the reporter on this story: Abigail Moses in London at Amoses5@bloomberg.net