Lloyds convinces bondholders to part with ECNs in bumper capital exchange

By Aimee Donnellan

LONDON, March 20 (IFR) - Lloyds Banking Group managed to cajole bondholders into handing over GBP4bn-equivalent of high-yielding capital notes in exchange for GBP4.4bn worth of higher risk Additional Tier 1 bonds, completing the first part of its capital strengthening exercise.

Lloyds, which is 33% owned by UK taxpayers, released the euro and sterling results of the exchange offer of Enhanced Capital Notes (ECNs) that were sold at the end of 2009 as part of a broader recapitalisation of the bank.

Despite the fact that the UK lender was switching investors into securities with a much higher risk profile - including coupon deferrals and a higher trigger - it was able to upsize the transaction by GBP350m and achieved an 81% take-up from investors keen to avoid a potential regulatory call at face value down the line.

Lloyds also issued the largest amount of Additional Tier 1 bonds in one day, accounting for around a quarter of the size of the entire market.

Investors and analysts alike believe that the offer which gave investors coupons in the range of 6.375% to 7.875% on the AT1 bonds was fair but say that the big question now is how Lloyds will treat holders of the outstanding ECNs.

"The interesting question for the remaining ECNs in all currencies is how to read Lloyds' intentions in the future," said Roger Francis, a strategist at Mizuho.

"The bonds still aren't callable, but they might become so in the future. Should investors fear a par call or has Lloyds shown itself to be investor friendly?"

Lloyds surprised investors last month, when it said it could buy back the ECNs at face value because new European rules mean that they are now unlikely to count towards its capital buffers.

The bonds were trading at a premium to their issue price because of the attractive interest they pay, and their value fell sharply after the warning as investors worried they could be short-changed.

The offer gave these investors the option to exit bonds at cash prices between 93 and 162.50, which one banker said was consistent with pre-launch trading prices.

The UK lender targeted 28 series of Enhanced Capital Notes (ECNs).

Accounts that took advantage of the offer have now been placed in perpetual bonds that are callable after five, six, nine and 15 years. The issues will be GBP1.481bn, EUR750m, GBP1.494 and GBP750m in size, respectively.

The high-profile retail exercise will pay bondholders cash equal to the prices in the exchange offer, while the US exchange has yet to be completed, although Lloyds has announced which retail bonds it will be targeting. That exercise is expected to expire on April 16.

On the US portion that is expected to expire on April 2, Lloyds is targeting four series of US dollar-denominated ECNs, offering holders up to USD1.675bn of new US dollar perpetual non-call 10-year notes. (Reporting by Aimee Donnellan; Editing by Helene Durand and Philip Wright)