Lloyds escapes bond redress costs after Supreme Court win

The Supreme Court has ruled that Lloyds Bank can redeem £3.3 billion of Enhanced Capital Notes at face value.

Related topics:  Finance News
Rozi Jones
16th June 2016
lloyds bank
"Lloyds shareholders will breathe a sigh of relief that a whole new avenue of redress has not opened up, just as the cost of PPI claims is coming to an end."

The bondholders who bought the case against Lloyds, many of whom were retail investors, received interest of up to 16% a year, but can now be forced to sell them back to Lloyds at face value.

In March 2009, Lloyds failed a stress test due to a shortfall in core tier 1 capital. It implemented a strategy to raise the necessary capital, involving a rights issue and a restructuring of some of its securities as enhanced capital notes.

ENCs would convert automatically into fully paid-up ordinary shares if Lloyd's core tier 1 capital ratio fell below a certain limit during a stress test.

Lloyds argued that the bonds no longer formed part of their capital for the purposes of regulatory stress tests, and are therefore entitled to redeem them.

However the Court's decision was not unanimous, with Lloyds scraping a 3-2 majority.

Laith Khalaf, Senior Analyst at Hargreaves Lansdown, said that "if the judgement had gone the other way, Lloyds may well have been on the hook for compensating bond holders for their notional losses".

Khalaf continued: "Lloyds has won the day, but it was a really close run thing. Lloyds shareholders will breathe a sigh of relief that a whole new avenue of redress has not opened up, just as the cost of PPI claims is coming to an end.

"Bondholders have basically lost out on future interest payments as a result of a shifting regulatory landscape, which encouraged the use of hybrid debt to bolster banks during the financial crisis, but has since seen new standards being set.

"The tangled web of terms and conditions the court has had to unpick demonstrates the complexity of hybrid debt securities, which is why the financial regulator has now restricted their sale to sophisticated investors only."

The ENCs are a form of 'contingent convertible debt'. The FCA has since banned the sale of this form of debt to retail investors, restricting their use to "professional, institutional and sophisticated investors only".

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