LONDON, Feb 14 (IFR) - Lloyds fired a warning shot about the
regulatory value of its ECNs on Thursday, sending the
instruments tumbling in a move reminiscent of Credit Suisse the
previous week and fuelling fears that banks are hardening their
stance on now useless capital instruments.
On an investor call held following the release of its fourth
quarter earnings, Lloyds faced an anxious pack of investors
desperate to know the fate of the Enhanced Capital Notes (ECNs)
that in some cases reward them with coupons of over 10%.
While the Tier 2 notes had counted as stress test capital up
until now, Lloyds said the probability of this continuing to be
the case had significantly diminished.
This sent the bonds tumbling, with some issues losing as
much as nine points on fears the bank could make use of a clause
allowing it to call the bonds at par - well below where they
have been trading - if they lose regulatory capital value.
"The tide is turning for investors," said Dierk Brandenburg,
a senior bank credit analyst at Fidelity.
"In a low rate environment banks are very focused on their
net interest margins and on growing share earnings and
dividends. Bondholders are less important than during the crisis
and shareholder interests are on the rise."
Richard Thomson, a senior credit analyst at Henderson Global
Investors, added that the bank had referred to its fiduciary
obligation to its shareholders on the call.
The move in Lloyds' bonds was reminiscent of what happened
to a USD1.5bn hybrid Tier 1 from Credit Suisse last week when
the Swiss bank made a similar announcement.
"Lloyds appeared to be talking down the bonds on purpose to
manage investor expectations," Thomson added.
While Lloyds has the option to play hard ball, buying the
bonds back at par and forcing bondholders to swallow a bitter
pill, analysts believe this is not likely to be the case.
"Our feeling is that Lloyds considers itself bondholder
friendly and would be more likely to choose some form of
liability management exercise at above par but potentially below
current levels," analysts at CreditSights wrote in a note on
Meanwhile, Christy Hajiloizou, a credit analyst at Barclays,
said there was a fine balance between being friendly to
investors and exercising regulatory rights that were spelled out
"Credit Suisse and others will be weighing up the
unidentified cost of angering investors with aggressive
regulatory calls that could be reflected in their future cost of
funding," she said.
It's easy to understand why the market is so focused on
Lloyds. The bailed-out lender has some GBP8bn of ECNs that trade
well above par, have regulatory calls and have double digit
Back in 2009 when Lloyds first issued ECNs, the bank was in
a dire situation, and the deal helped it get back on its feet by
injecting much needed capital.
But the bank is understandably weighing its options now that
it has turned a profit, and given also that the notes will be
unlikely to count towards stress test capital due to their 5%
trigger - below the 5.5% required by the European Bank Authority
for this year's tests.
While it remains to be seen what Lloyds does, it may follow
Credit Suisse's path. The Swiss bank on Friday announced that it
was offering to buy back its USD1.5bn hybrid Tier 1 at 103
instead of a straight call at par, offering an olive branch to
The bonds had been trading as high as 107 before the
announcements, but plummeted to the 103 offer price.
"Credit Suisse is being pretty fair with investors but it's
understandable that people are now expressing concerns about
Lloyds' ECNs given they trade significantly above par and are
unlikely to count as stress test capital," said Thomson.