By Iain Withers and Abhinav Ramnarayan
LONDON (Reuters) - Lloyds Banking Group <LLOY.L> told investors on Friday it would not redeem a 750 million euro "CoCo" bond, a move that would have reduced its capital base just as banks face a spike in bad loans during the COVID-19 crisis.
Britain's biggest domestic lender said it would not exercise its call option on the Additional Tier 1 bond - a type of contingent convertible instrument and the riskiest debt banks can issue - on June 27. The bonds will reset to a new fixed coupon until the next call date in June 2025.
Lloyds said it remained strongly capitalised, but added: "As a result of the extraordinary market challenges presented by COVID-19, the group has decided it is prudent to not reduce Tier 1 resources at this time."
Banks have typically repaid such bonds at the first opportunity and issued new debt to replace them. But analysts believe many lenders will now pass up the chance, with Deutsche Bank among the first to do so in March.
Lloyds said it would be "uneconomic" to refinance the paper at the current time. Yields on AT1 debt have risen since early March.
AT1 bonds are designed as a protective layer to ultimately prevent the need for government bailouts in times of trouble. They are perpetual in nature but can be called, typically after five or six years.
Like other major British banks, Lloyds' first quarter profits were heavily dented by provisioning for likely bad loans due to the crisis, with the bank setting aside 1.4 billion pounds.
Lloyds' decision not to call its bond comes a day after a sizeable investor rebellion against the bank's pay plans for top bosses at its annual investor meeting.
(Reporting by Iain Withers and Abhinav Ramnarayan; Editing by Kirsten Donovan)