- Funds said to hope for legal victory or better terms
- High-interest bonds were sold at height of financial crisis
Some of the world’s biggest money managers are fighting Lloyds Banking Group Plc’s latest effort to avoid more than $1 billion in bond payments.
Pacific Investment Management Co. and BlueBay Asset Management are among firms resisting an offer from Lloyds to buy back bonds at a premium of about 2 percent in exchange for giving up legal claims for more, according to people with knowledge of the matter. Holders representing more than half the $3.7 billion of debt in the tender offer held calls this week to explore options. Investors have pushed the London-based bank for better terms and talks are ongoing, the people said, asking not to be identified as the information isn’t public.
Lloyds has given investors as few as six working days to decide whether to accept its offer to repurchase the contingent capital, or CoCo, bonds. Those who accept risk missing out on potentially higher payments if bondholders succeed in winning an appeal in the U.K. Supreme Court. Those who turn it down will lose the premium if the court upholds Lloyds’ right to redeem the notes at par.
The bank, which issued the notes at the height of the 2009 financial crisis to avoid falling under government control, has said its offer price reflects the fact that bondholders received interest payments over the past year. The lender could have redeemed the Enhanced Capital Notes at face value after 2014 stress tests because the regulator didn’t include them in capital calculations, according to an appeals court.
Representatives for Lloyds and Pimco declined to comment on responses to the tender offer. An official at BlueBay didn’t immediately comment.
“Lloyds has moved very aggressively and very quickly, with a very short window clearly designed to give investors no time to react,” said Mark Taber, who has worked with a group of individual investors for the past couple of years in the case against the bank. “Investors are furious about it,” he said.
The premium being offered is too small, given the chance that the bank could lose in court, Taber said. Bondholders seeking to prevent the redemption are waiting to see whether the Supreme Court will hear the case. An appeals court in December overturned an earlier decision in the investors’ favor. The case partly hinges on what Lloyds regards as a drafting mistake in the credit pact.
Holders of $2.8 billion of notes in the tender have to commit by the end of Monday. The offer was announced on Jan. 29. Investors with more than $900 million of dollar-denominated notes have until March 2, according to a company filing.
Lloyds has said it will call at par any bonds not sold in the tender offer, and that it will compensate redeemed-note holders, if it loses in the Supreme Court. The bank has already called a separate group of about $1 billion of similar CoCo notes. It has said that redeeming all $4.7 billion would save 200 million pounds a year in interest payments through 2020. CoCo bonds carry high coupons because the issuer can halt payments or swap the notes for equity if capital levels fall too low.
Notes included in the tender have fallen close to the offer price, according to data compiled by Bloomberg. The bank’s 125.3 million euros ($140 million) of 8.875 percent notes due in February 2020 have dropped to 102 cents on the euro from 105 cents last week and 120 cents before the appeals court ruling.
“It’s not an outrageous offer,” said Bastian Gries, the head of corporate credit at Oddo Meriten Asset Management, which oversees about 25 billion euros of assets. Gries said he sold his Lloyds notes a few weeks ago. “People were expecting a more attractive offer because Lloyds have been bondholder-friendly in other exercises.”