The U.S. Securities and Exchange Commission pushed Lloyds Banking Group Plc to give bondholders more details on the terms of its buyback offer as the British bank prepares for a legal battle with creditors in the U.K. Supreme Court, people with knowledge of the matter said.
Lloyds amended the language of its tender offer last week. It made the change after bondholders lobbied the SEC to weigh in, the people said, asking not to be identified as the information isn’t public. The SEC pressed Lloyds to clarify how compensation will be decided if the Supreme Court reverses a lower-court ruling that allowed early redemption of the high-coupon bonds, the people said.
The bank subsequently updated its tender offer on Feb. 25, saying that compensation “would be determined by the English courts or, if appropriate, agreed by the Group” with the trustee of the so-called Enhanced Capital Notes. In its initial statements, the bank had said that those investors not participating in the tender offer would have their bonds taken back at par, and if it were to lose the battle in court, the bank would "compensate fairly" those investors.
Representatives for Lloyds and the SEC declined to comment on the discussions.
The bank, which issued the notes at the height of the 2009 financial crisis to avoid falling under government control, has been locked in a lengthy dispute with creditors resisting its bid to re-purchase 3.3 billion pounds ($4.6 billion) of the so-called contingent convertible or CoCo bonds.
U.S. investors holding $930 million of the notes have until March 2 to decide whether to accept the offer, after the bank convinced about a third of the European investors to give up their holdings. Lloyds has been offering a premium of about 2 percent in exchange for them walking away from legal claims.
"This has been a long-running process, and it’s been difficult for all people involved in it," Toby Rougier, group corporate treasurer at the bank, said on a Feb. 25 earnings call.
"It’s been a particularly painful process for all of us involved, bondholders and us as well," Douglas Radcliffe, an investor relations director at the bank said on the Feb. 25th earnings call with investors and analysts.
The U.K. Supreme Court, which decided to intervene after Lloyds commenced the buyback program in January, is set to rule on whether the bank can redeem the bonds. That comes after a U.K. appeals court said in December that the London-based lender had the right to redeem the notes despite the objections of some investors. Interest payments on the bonds averaged about 10 percent a year, costing Lloyds about 200 million pounds annually. Some of them don’t expire until 2020.
Lloyds issued the contingent convertible notes, which can 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. Lloyds said this occurred when the U.K. Prudential Regulation Authority decided not to consider the notes in 2014 stress tests.
The Supreme Court begins hearing arguments on March 21.