Lloyds ECNs gain ground as market awaits judgment

By Alice Gledhill

LONDON, April 1 (IFR) - Some of Lloyds Banking Group's Enhanced Capital Notes (ECNs) have jumped in the secondary market, suggesting investors hope that a ruling on the legality of the bonds' proposed early redemption will go against the bank.

The Group's 11.04% March 2020s were quoted at a cash price of 102.65 on Monday, but have spiked to 105.71 on Wednesday, according to Tradeweb prices. Meanwhile its 7.5884% May 2020s have gained almost three points to 104 and its 9.125% July 2020s around a point to 103.5.

Lloyds on Tuesday received permission from the Prudential Regulation Authority (PRA) to declare a "capital disqualification event" that would allow it to redeem the notes at par.

However, Lloyds will refrain from exercising the call for the time being because the trustee, Bank of New York Mellon, acting on behalf of certain bondholders, is seeking a "declaratory judgment" that will decide if bondholders' contractual rights have been breached.

The disqualification event was triggered because the PRA did not count ECNs as core capital for its stress tests, the results of which were published in December.

Bondholders are unhappy because the market placed a higher value on the bonds before Lloyds announced the call, and because of generous coupons - in some cases as high as 16%.

Mark Taber of the website fixedincomeinvestments.org.uk, who has been campaigning on the bondholders' behalf, hopes that the declaratory judgment will clarify the legality of the call.

The ECNs in question have a par value of around GBP700m. Taber believes that the majority are held by retail investors, although others have disputed this.

"The judgement is relevant to all ECNs, not just those targeted for redemption now, as it would be binding on all ECNs. The penny should now drop with institutional investors - who didn't need to stick their head above the parapet until now - that they have an equal interest in the outcome," Taber said.

A Lloyds spokesperson said that the bank welcomed the PRA's permission to call the notes and will work with the Trustee on the declaratory judgment in order to provide certainty for all involved.

The bank has a total of around GBP3.3bn of ECNs outstanding from the GBP8.3bn that were sold at the end of 2009 as part of a broader recapitalisation.

Around GBP5bn were exchanged for cash or Additional Tier 1 securities in March and April last year via a liability management exercise.

Lloyds is now reviewing different options for the remaining series of ECNs.

"The un-exchanged ECNs left out of this process could well see another exchange, for example into holdco debt, with the alternative being the regulatory call," BNP Paribas (LSE: 0HB5.L - news) analysts wrote in a note on Tuesday. (Reporting by Alice Gledhill, Editing by Helene Durand and Julian Baker)