Lloyds urged to get "fairness" opinion on bond offer

Mon Mar 10, 2014 1:33pm EDT

* Retail investor campaigner hits back after Lloyds offer

* Taber says retail offer not fair relative to the institutional offer

By Steve Slater

LONDON, March 10 (IFR) - Britain's financial watchdog has been urged not to approve Lloyds Banking Group's offer to buy back bonds from up to 120,000 retail investors until an independent assessment of its fairness is carried out.

Mark Taber, a campaigner for retail bondholders, accused the Financial Conduct Authority of "lazy, broad brush regulation" over how it is allowing Lloyds to treat bondholders who helped to rescue the bank in the financial crisis. This is in contrast with institutional buyers who, by and large, think the offer is fair albeit not generous.

Lloyds has £8.4 billion ($14 billion) of the hybrid bonds, known as enhanced capital notes (ECNs), which were issued in 2009 and convert into capital if the bank's capital ratio falls.

New UK and European regulations could mean the ECNs will not count as capital if the bank hits trouble, so the bank has offered institutions the chance to swap them for new bonds and given retail investors the opportunity to cash in. The operation could cost Lloyds £1 billion, but it will save money, lowering annual interest costs.

Lloyds said cash was being offered to retail investors given the uncertainty about how the bonds would be affected by new capital rules. If they do not qualify as "stress test" capital Lloyds can buy them back at face value.

Taber said in a letter sent to senior regulators the terms being offered to retail investors were unfair.

"The terms of the proposed offer are not fair to retail investors," Taber said, saying that was based on the terms relative to an exchange offer to institutions and because of the "opaque and inaccurate information" provided around the changing capital rules.

Taber said Lloyds could achieve a better solution by agreeing with investors the definition of capital, and to modify the terms of the ECNs, so they would continue to count as capital if the bank hits trouble.

RISKIER BONDS

He said that option was not possible, however, because the FCA does not want retail investors to hold these types of bank securities.

Unlike the ECNs that are Tier 2 bonds which mature and have must-pay coupons, the new Additional Tier 1 offered to institutional investors as part of the swap are far riskier, being perpetual with discretionary coupon payments.

Furthermore, bondholders in the new securities could be converted into equity a lot earlier than ECNs holders as the trigger for conversation has been set at 7% of Common Equity Tier 1 versus 5% of Core Tier 1 for the ECNs.

According to two bankers the 5% Core Tier trigger equates to around 1% in Common Equity Tier 1 terms, the new Basel 3 capital definition.

"Additional Tier 1 is very complicated and you don't want retail investors to be involved in them," said Neil Williamson, head of EMEA credit research at Aberdeen Asset Management.

"When things go wrong, as we saw with the Coop, retail investors are usually treated more favourably, so the bonds are much less useful as loss absorbing capital."

However, Taber said as well as looking like lazy, broad brush regulation, the FCA had failed to exercise suitable judgment in particular special circumstances.

The letter was sent to FCA Chairman John Griffiths-Jones and CEO Martin Wheatley, and a copy was seen by Reuters. Taber has previously led successful campaigns for retail bondholders in Bank of Ireland and Co-operative Bank.

A spokesman for the FCA declined to comment on the letter, but he said the regulator had held talks with Lloyds before the offer and made clear that banks issuing such instruments "must treat both retail and institutional investors fairly".

Lloyds said the offers were made at prices "consistent with current trading prices." Retail investors are being offered premiums of 6-14% above the face value on most of the bonds.

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