Lloyds ups size of exchange offer

LONDON (Reuters) - Lloyds said Wednesday that it was increasing the size of its hybrid bond exchange to 9 billion pounds due to strong investor demand.

The maximum amount of new bonds, known as enhanced capital notes (ECNs), under a non-US exchange offer may rise to seven billion pounds from 5.5 billion pounds.

The bank said all other parts of its exchange offer remain unchanged.

As part of an agreement on state aid with the European Union Lloyds is not able to pay coupons nor redeem bonds on its existing hybrids for two years.

Thus the motivation for bondholders to exchange is driven by a sweetener of between 1.5 and 2.5 percent additional yield if they do, and a very strong disincentive not to be left behind in the old Lloyds hybrid bonds.

There are 52 Tier 1 and Upper Tier 2 bonds that are eligible for exchange in the non-US offer, which total 14.3 billion pounds nominal.

Under the original offer on November 3, Lloyds set out a list which gave a priority for these 52 hybrid bonds to exchange into ECNs.

Because the nominal amount of the 52 bonds is only 14.3 billion pounds, while the US exchange total is $2.2 billion (1.3 billion pounds), it would only take a little over half of bondholder approval for the 5.5 billion original ECN to be fully subscribed.

If not exchanged, existing bondholders can either be considered for the exchange consideration amount (ECA), which consists of ordinary shares or cash, which is still capped at 1.5 billion pounds.

Under the terms of the original offer, Lloyds had flexibility to issue additional ECNs.

Lloyds also stated that if less than 7 billion pounds of ECNs are exchanged under the non-US offer it may raise the amount of the US exchange total from 500 million pounds (equivalent)

(Editing by Elaine Hardcastle)