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Investors granted appeal as Lloyds redeems bonds

Lloyds is going ahead with the redemption of its bonds despite investors being granted a Supreme Court appeal.

Investors granted appeal as Lloyds redeems bonds

Lloyds bondholders have been granted a Supreme Court appeal but it could be too little too late as the bank is going ahead with the redemption.

In a last minute announcement, the Supreme Court has granted ‘enhanced capital notes’ (ECNs) investors the chance to appeal the redemption of their investments, despite Lloyds attempting to block a further court case.

However, the right to appeal has come too late for the thousands of bondholders who will see their bonds, some of which paid generous yields of up to 11%, redeemed from today.

Mark Taber, a fixed income expert who has been helping bondholders, said the investors are willing to fight the bank in the Supreme Court but the best they can hope for it compensation from Lloyds, which issued the ECNs as part of a bank rescue plan at the height of the financial crisis.

Taber said the compensation plan was unfair as investors – many of who are retirees – want income, not compensation.

‘[If they lose] Lloyds has said they’re going to compensate everyone,’ he said. ‘It is so unfair on people; how will [Lloyds] make sure everyone automatically gets compensation rather than have to fight for it?

‘How much will the compensation be? Who will determine it? Who will look into this? And will the bondholders have to go to court to get it?’

Taber added that some bondholders faced ‘huge tax bills’ due to the redemption and that if they were compensated after a Supreme Court win they would still be at a tax disadvantage because ‘if they get compensation it will not automatically go into their ISA or Sipp’.

Although the Supreme Court appeal will be expedited to speed up the process, the court battle is the latest in a long-running saga that has seen bondholders dragged through the High Court and Court of Appeal.

The High Court initially ruled in bondholders’ favour but the decision was over-turned by the Court of Appeal as Lloyds insisted it had ‘made a mistake’ in its contract with investors and should be entitled to redeem the bonds.

When the Court of Appeal handed down its verdict it said the bondholders would not be able to appeal in the Supreme Court meaning trustees had to gain permission from the Supreme Court for the hearing to take place.

Lloyds tried to block the application stating ‘the proposed appeal does not raise any arguable point of law of general public importance which ought to be considered by the Supreme Court at this time’ and that the ‘decision has no wider significance to anyone other than the issuers and holders of ECNs’.

Taber criticised Lloyds for continuing its fight against bondholders, believing it would be more cost-effective to pay the bond income than pay legal fees.

‘There is no reason or logic behind this,’ he said. ‘It is going to cost a whole lot more than to leave the bonds running and will be an almighty headache [for Lloyds] – they’re just annoying people even more.’

Lloyds confirmed it would go ahead with the redemption.

Background to the battle

The ECNs started life as permanent interest bearing shares (Pibs), a type of bond that were converted by the bank in 2009 when it urgently needed to boost its regulatory capital.

However, the problem arose over whether a ‘capital disqualification event’ (CDE) occurred that would allow the bank to buy back the bonds, which pay interest rates of up to 11% and are an expensive form of debt for Lloyds to service.

Lloyds argued that a CDE occurred last year when the Prudential Regulatory Authority (PRA) stress-tested the bank to see if it could withstand another crash but it did not include the ECNs as part of its reserves.

The High Court then ruled a CDE had not taken place as the regulator could include the bonds in a future stress test. Lloyds argued that it had made a mistake and had meant to insert a clause for a CDE into its contract that would have been triggered if regulators raised the amount of ‘tier one’ capital it had to set aside to above 5%.

At the time the Pibs were converted to ECNs the requirement was for 4% of capital, meaning the 5% trigger would have been easily reached as regulators forced banks to strengthen their balance sheets in response to the credit crunch. 

Bondholders argued they had not been told about the 4% figure and that if they had, they would not have switched their Pibs to ECNs.

5 comments so far. Why not have your say?

Franco Bristolian

Feb 09, 2016 at 16:01

Of course there is an issue of public importance.

It's whether an institution can avoid the consequences of the incompetence of its advisers and own staff simply by saying "We made a mistake".

A customer of the bank who tried to avoid repaying a loan because he hadn't understood the consequences of a clause in the loan documentation that he had signed would be laughed at by the bank, and the Supreme Court ought to laugh at Lloyds.

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Feb 09, 2016 at 20:23

I'm tired of listening to the unbelievable greed of these miss-guided bondholders and their adviser. Stop bashing the bank(s) to death, the country needs a strong banking system and they are not cash cows for most to try and plunder. Had their greed, and believe me these are probably a very wealthy bunch, not been so great, a sensible compromise could probably been achieved. For god's sake, get over it and move on! You've already made a hell of a lot of money at these goes to money!

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Feb 09, 2016 at 21:04

There is another matter in respect of these ECNs which should not be forgotten.

The ECN prospectus contains a 'pari-passu' clause* - all will be treated equally. In 2014 Lloyds arranged to swap the majority of ECNs for new additional Tier 1 (AT1) capital bonds. AT1s being an alternative 'high coupon' instrument. But this arrangement was limited to large holders only. There was no 'equal' or 'simliar' arrangement available to smaller holders. This was a breach of 'pari-passu'. Had the ECNs continued to maturity, smaller holders would still hold an instrument with a respectable coupon and term. But on early redemption they do not. This act crystalises the pari-passu breach. The breach of 'pari-passu' remains and any Court Ruling on a CDE can only affect the degree. Put simply, whatever the outcome Lloyds have failed to treat everyone equally and that itself is unfair.

DEFINITION of 'Pari-passu'

A Latin phrase meaning "equal footing" that describes situations where two or more assets, securities, creditors or obligations are equally managed without any display of preference.

* "The ECNs and Coupons constitute direct, unsecured and subordinated obligations of the Issuer and rank pari passu and without any preference amongst themselves."

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Feb 09, 2016 at 21:19

Taurus, Passing over most of your own misguided rant, you need to be aware that despite invitation, Lloyds have never come to the table to discuss a 'sensible compromise'. They have preferred their own pertinacious approach. I am certain that a 'sensible compromise' would have been welcomed by Noteholders. But, as they say, 'it takes two to tango'.

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Feb 13, 2016 at 10:19

@Taurus: Ignorance is bliss, is it not? I'm sure you are feeling very blissful today. A liitle time spent understanding the huge issues at stake here would serve you well, IMV! Oh! and by the way, Mark Taber is a super star! You could do well and emulate him. :)

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