Lloyds to redeem £3bn special bonds this month following court victory

In December, the Court of Appeal 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 had been fighting Edinburgh-based Lloyds’ attempt to force the sale of the bonds, which pay generous yields of up to 11 per cent meaning they would have cost the firm around £200m over the next five years.

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.

The bank will now redeem the enhanced capital notes, following approval from the Prudential Regulatory Authority.

They will be redeemed on 9 February, Lloyds said.