By Aimee Donnellan and Steve Slater
LONDON, March 6 (IFR) - Lloyds Banking Group is
offering bondholders who helped rescue the bank five years ago
the chance to swap into new debt that meets capital rules, and
is giving thousands of retail investors the chance to cash in
Lloyds, 33% owned by the UK taxpayer, said on Thursday it
was making the massive bond exchange and repurchase offer to
align its capital base with new European rules, and to give
investors the chance to reduce uncertainty around their
The lender is offering institutional investors the chance to
swap up to £5 billion of their bonds for the new instruments.
Retail investors are being offered cash to motivate them to
Lloyds surprised investors last month when it said it could
buy back at face value £8.4 billion ($14 billion) of bonds it
issued to strengthen its capital in 2009, because new European
rules mean they are now unlikely to count towards its capital
The instruments, known as enhanced capital notes (ECNs),
look relatively low risk against the current market backdrop and
pay high annual interest of between 6% and 16%, so are an
attractive investment. Hedge funds and asset managers are big
holders of the bonds, but there are also up to 130,000 retail
The bonds had traded at a substantial premium to their issue
price, but their value fell by as much as nine points after last
month's warning from Lloyds. Once the exchange was announced the
securities recovered some of those losses, rallying by as much
as four points on Thursday.
For Lloyds, the new rules could make them worthless in
bolstering its capital if the bank hits trouble. Under the terms
of their sale, that would allow it to buy them back at face
It is offering to swap them for new additional Tier 1
instruments that will convert into Lloyds shares if the bank's
common equity Tier 1 ratio falls below 7%. The current ECNs only
convert if core capital falls below 5%.
BALANCE SHEET IMPACT
Lloyds said it will take an accounting charge of about £1
billion in the first half of this year, based on a full take-up
of the offer. That would knock 0.4 percentage points off its
common equity Tier 1 ratio.
But the bank will save money from lower future interest
payments, which it said would boost its net interest margin by 5
basis points this year.
It will pay annual interest of between 6.375% and 7.875% on
the new bonds, compared to an average coupon of 9.3% on the
Lloyds said the offer to institutions and retail investors
was being made at "a price consistent with current trading
prices," although many of those prices have fallen in the last
Mark Taber, a campaigner for retail bondholders, last week
wrote to Lloyds urging a fair deal and saying it would be
"irresponsible and short-termist" of the bank to say it could
buy back the bonds at their face value.
"The cash offers look a bit low on some of them, which when
combined with the implied threat to try and scare you, people
will feel there's a bit of bully boy stuff going on here I
think," Taber said on Thursday.
"This is basically an offer a bank makes just before they
stick the knife in," a banker said.
Additional Tier 1 bonds are first in the line of fire if
Lloyds runs into difficulty, which could lead to coupon
deferrals on the perpetual instruments.
Despite the riskier elements of these trades, investors from
around the globe have been scrambling to buy similar deals from
the likes of Nationwide and Barclays.
Lloyds, which last month reported a profit for the first
time in three years, is not the first bank to harden its stance
on high-interest paying bonds that may no longer have any use in
bolstering capital. Credit Suisse last month fired a
similar warning shot.
Banks can save annual interest costs, but upsetting
bondholders could prove damaging for future fundraising.
Due to the mammoth scale of the task Lloyds has hired a team
of banks to assist, with Bank of America Merrill Lynch, Lloyds
and Goldman Sachs taking the top line as global coordinators for
euro and sterling offers, Deutsche Bank and UBS acting as
joint-lead dealer managers, and Barclays, BNP Paribas,
Citigroup, Credit Agricole CIB, Credit Suisse, HSBC, JP Morgan
and Morgan Stanley acting as joint dealer managers.
On the dollar transaction, Bank of America Merrill Lynch and
Goldman Sachs are global coordinators. Barclays, Lloyds and
Morgan Stanley are joint lead dealer managers while BNP Paribas,
Citigroup, Deutsche Bank, HSBC, JP Morgan and UBS are joint