Lloyds Wins Court Approval to Redeem $5 Billion CoCo Bonds

  • Three appeals court judges say bank has right to redeem notes
  • Convertible notes first sold in 2009 after capital shortfall

Lloyds Banking Group Plc won approval from a London appeals court for early redemption of as much as 3.3 billion pounds ($5 billion) of contingent capital bonds.

Three judges allowed Lloyds appeal and said the bank had the right to redeem the notes. Lloyds shares rose as much as 1.7 percent following the ruling, while the bonds fell as much as 7 percent.

Investors in the so-called Enhanced Capital Notes, represented by trustee Bank of New York Mellon Corp., won the first round of the dispute in June. The bonds are costing Lloyds about 200 million pounds a year and some don’t expire until 2020.

Lloyds issued contingent convertible notes, which convert into shares to absorb losses, in 2009 after U.K. regulators found a 29 billion-pound shortfall in its core capital. The note terms allow for them to be redeemed at face value in the event of regulatory changes, which Lloyds says occurred when the U.K. Prudential Regulation Authority decided not to count them in stress tests last year.

“It is the ability of the ECNs to assist in passing the stress test that is the governing criterion,” one of the judges, Michael Briggs, said in the ruling. “They have now ceased to play any useful part in doing so, and are on the face of it unlikely to do so again for the foreseeable future.”

Shares Rise

Lloyds shares rose 1.2 percent to 71.48 pounds at 11:32 a.m. in London trading.

The bank said in a statement it intended to call the December 6, 2014 ECNs under the regulatory call right, and would consider its options for the remaining notes.

Lloyds’s 614 million euros ($672 million) of 6.385 percent subordinated notes maturing in May 2020, one of the securities affected by the ruling, fell 8 cents on the euro to 103 cents, the biggest intraday decline in more than five years, Bloomberg data show. Lloyds’s 60.5 million pounds of 7.5884 percent notes due May 2020 fell 4 percent to 101 pence.

If the bank redeems the notes early, bondholders will lose interests payments averaging about 10 percent a year.

Retail Investors

“It’s an appalling and surprising decision by the appeal court, clearly favoring Lloyds even after they admitted errors in the drafting of the notes,” said Gary Kirk, a partner at TwentyFour Asset Management, a former investor in the notes. “The retail investor has been treated incredibly badly and I’d be surprised if that was the last we heard of them.”

The fact that some noteholders are retail investors isn’t relevant, said another appeal judge Elizabeth Gloster. They should have understood the risk that the status of the ECNs might change.

The investors can appeal only if the U.K. Supreme Court agrees to hear the case.

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