Third Round of Lloyds CoCo-Bond Fight Reaches U.K. Supreme Court

  • Lloyds won appeal court ruling on early redemption in December
  • Convertible notes first sold in 2009 after capital shortfall

The third round of an almost year-long court battle over whether Lloyds Banking Group Plc could redeem 3.3 billion pounds ($4.75 billion) in contingent-capital bonds kicked off at the U.K. Supreme Court Monday.

The battle over the bonds is one of many remnants of the global financial crisis working their way through London courts. Lloyds, which had to be rescued by taxpayers, issued the instruments in 2009 after U.K. regulators found a shortfall of as much as 29 billion pounds in core capital, a measure of the bank’s ability to absorb losses. 

Investors in the so-called Enhanced Capital Notes, won the first round of the dispute in June when a judge said a capital-disqualification event didn’t occur but lost at a higher court when judges decided the bank had the right to redeem the notes early. Lawyers for the investors said the appeal court made a mistake by relying on technical and specialist information as part of the facts of the case.

"The starting point is the wording of the definition of a capital-disqualification event," Robin Dicker, a lawyer representing the investors, told a five-judge panel in the U.K. Supreme Court Monday. "There is nothing in the memorandum or documents which would have informed an investor to read the conditions in the way the Court of Appeal did."

Lloyds said it was scheduled to redeem all the notes by March 18 after it won the Court of Appeal ruling in December. If the lender loses at the Supreme Court, it would have to compensate the investors for any losses caused by the early redemption.

The note terms allowed 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.

The fact that a "significant" number of the noteholders are retail investors isn’t relevant, appellate judge Elizabeth Gloster said in an earlier ruling. They should have understood the risk that the status of the ECNs might change.

"It would be wrong to assume that even institutional investors were aware of the detailed regulatory information," in the terms and conditions, Dicker said.

Lawyer for Lloyds will present their arguments later in the hearing.

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