* Retail investor campaigner hits back after Lloyds offer
* Taber says retail offer not fair relative to the
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
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.
He said that option was not possible, however, because the
FCA does not want retail investors to hold these types of bank
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
"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.