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Supreme Court puts new twist on Lloyds ECN saga

(Updates with extension of tender offer, Lloyds statement)

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, and prompted the UK lender on Tuesday to extend the current tender offer on some of the notes.

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"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.

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 non-US offer offer originally expired on February 8, but Lloyds said on Tuesday that it would extend it to 4pm on February 11 to let bondholders reconsider their participation in the offer.

"The Group continues to seek to balance the interests of all stakeholders in this matter and has previously confirmed that, if the Supreme Court were to determine that a capital disqualification event had not occurred in relation to the ECNs, it would compensate fairly the holders of the ECNs...for losses suffered as a result of such early redemption," it said in a statement.

Lloyds also said in late January 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.

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)