Lloyds appeal win will force high-yield bondholders to sell

Royal Courts of Justice
Royal Courts of Justice

Holder’s of high-yield Lloyds bonds issued at the time of the financial crisis have been ordered by a court to sell them after agreeing that the lender had made a mistake.

The Court of Appeal has ruled in Lloyds’ favour after the bank argued it had made an error in its contracts with 100,000 bondholders who bought high yielding ‘enhanced capital notes’ (ECNs) as part of a bank rescue plan when the financial crisis sent it to the wall.

Investors have been fighting Edinburgh-based Lloyds’ attempt to force the sale of the bonds, which pay generous yields of up to 11 per cent.



The long-running saga over the bonds stems from them starting life as permanent interest bearing shares (Pibs), which are another type of bond structure but were converted by the bank in 2009 when it urgently needed to boost its regulatory capital.

However, the problem arose over whether a “capital disqualification event” (CDE) occurred that would allow the bank to buy back the bonds, which pay interest rates of up to 11 per cent and are an expensive form of debt for Lloyds to service.

Lloyds argued that a CDE occurred last year when the Prudential Regulatory Authority (PRA) stress-tested the bank to see if it could withstand another crash but it did not include the ECNs as part of its reserves.

The High Court then ruled a CDE had not taken place as the regulator could include the bonds in a future stress test. Lloyds argued that it had made a mistake and had meant to insert a clause for a CDE into its contract that would have been triggered if regulators raised the amount of ‘tier one’ capital it had to set aside to above 5 per cent.

At the time the Pibs were converted to ECNs the contractual requirement was for 4 per cent of capital, meaning a 5 per cent trigger would easily be reached as banks were forced to strengthen their balance sheets.

Bondholders argued they had not been told about the 4 per cent figure and that if they had, they would not have switched their Pibs to ECNs.

In a statement to the stock exchange, Lloyds said the judgement “gives the group the right, subject to conditions, to redeem any series of ECNs at par or (in relation to certain series) to make-whole price”.

“The group reserves its right to exercise the regulatory call right and redeem any or all series of ECNs at any time in accordance with the terms and conditions of each series of ECNs.”

The Court of Appeal ruling came as a shock to fixed income expert Mark Taber, who campaigned on behalf of the bondholders, and was credited with a victory in the High Court, which Lloyds then appealed.

“I am in shock,” said Taber, who runs the Fixed Income Investments website. “Lloyds has done what it set out to do and have successfully argued they made a mistake in the offer document.”

Taber urged the City watchdog, the Financial Conduct Authority (FCA), to put greater protection in place for consumers buying investments, akin to the Sale of Goods Act.

“There should be rules in place to protect consumers who should not have to mount hugely expensive and time-consuming campaigns to protect themselves from banks acting in this way,” he said.

“I am curious to see where the FCA goes with this… those investors helped the bank when it was on its knees.”

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