February 25, 2014 / 4:45 PM / in 4 years

Lloyds urged to avoid "irresponsible" bond buyback

LONDON, Feb 25 (Reuters) - Lloyds Banking Group has been urged by a campaigner for retail investors not to be “irresponsible and short-termist” over how it treats bondholders who helped to rescue the bank in the financial crisis.

The British bank, which is 33 percent owned by UK taxpayers, told investors this month that it could buy back at face value the 7.5 billion pounds ($12.5 billion) of bonds it issued to strengthen its capital in 2009 because new European rules mean that they are now unlikely to count towards its capital buffers.

With the bonds trading at a premium to their issue price, investors fear they could be short-changed by an enforced sale.

Mark Taber, who has previously led successful campaigns for retail bondholders in Bank of Ireland and Co-operative Bank, said in a letter to Lloyds on Tuesday that it “would be irresponsible and short-termist” of the bank to call in the enhanced capital notes (ECNs) on the basis that they no longer count as qualifying capital for European banking stress tests this year.

“If Lloyds considers there is an issue with the capital status of the ECNs, then it should be engaging openly and constructively with all stakeholders in order that a consensual solution can be reached,” the letter said.

With up to 123,000 retail investors holding the ECNs, Taber told Reuters last week that there was mounting concern about comments the bank made to analysts on Feb. 13. Bond prices fell after the comments.

Banks can save annual interest costs by buying back high-yielding bonds, leading many to take a harder line on the issue. However, upsetting bondholders including hedge funds and other big investors could prove damaging for future fundraising and analysts said Lloyds is unlikely to offer the bare minimum.

Taber said that investors had not been made aware of the risk that the bonds could be called in because of regulatory issues.

His letter said the ECNs had been structured in extensive consultation with the UK regulator to meet Lloyds’ long-term capital requirements. To disqualify them now because of a change in the definition of capital “directly contradicts the historical basis for the terms and the understanding on which they were exchanged”, he said.

Taber sent the letter to Charles King, Lloyds’ head of investor relations, who was on the Feb. 13 call, and sent copies to senior UK regulators and politicians.

A spokesman for Lloyds said it maintains contact with a range of stakeholders but does not comment on individual cases.

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