Supreme Court puts new twist on Lloyds ECN saga

By Alice Gledhill

LONDON, Feb 9 (IFR) - The Supreme Court ruled late on Monday that holders of Lloyds' Enhanced Capital Notes have the right to appeal the bank's decision to buy the bonds back, providing a new twist in the saga of the high-yielding bonds.

The ECNs have been at the heart of a legal battle with investors, who argue that the bank does not have the right to call the bonds. Monday's announcement overturns the Court of Appeal's ruling in December that Lloyds could proceed with a call.

"The Trustee has been informed that, following its application to the Supreme Court dated 6 January 2016, permission has been granted to appeal against the judgment of the Court of Appeal. The Supreme Court has indicated that the hearing of the appeal would be expedited," the trustee said.

Lloyds said it is reviewing the Supreme Court's decision and will provide a further update later on Tuesday.

The UK lender argues that it has the right to call the bonds because they were not counted as core capital by the most recent Prudential Regulatory Authority stress tests, triggering a capital disqualification event.

The PRA has also given Lloyds permission to redeem all the outstanding ECNs.

The Supreme Court's ruling came just a day before some of the notes were due to be redeemed and the results of a tender offer on the remaining notes were due.

Lloyds announced in late January that it was launching US and non-US tenders on more than £2.6bn-equivalent of the ECNs denominated in sterling, euros and US dollars. It planned to redeem any remaining bonds at face value. The offer expired on February 8.

At the same time it announced that it would redeem the ECNs not subject to the tender, worth around £700m, at face value on February 9. Those bonds were prioritised for redemption because bondholders already had the opportunity to participate in a 2014 liability management exercise.

Lloyds said when it launched the tender that it would compensate bondholders "fairly" for losses suffered as a result of early redemption should the Supreme Court agree to hear the trustee's appeal and rule that a disqualification event did not in fact take place.

The notes were issued in 2009 as part of a £22.5bn capital raise to bring the bank back to health and to count as stress test core capital.

However, they have since lost much of their regulatory capital value as new rules have been implemented. Some £3.3bn-equivalent of the £8.4bn-equivalent issued is still outstanding. (Reporting by Alice Gledhill, editing by Helene Durand and Julian Baker)