Lloyds wins final Supreme Court battle with bondholders

The victory could save Lloyds Banking Group up to £1bn.

Rebel investors had fought for years against forced repurchase of enhanced capital note (ECN) bonds.

But the Supreme Court said the bank had been entitled to buy back the bonds at their original issue price.

The bonds had originally been issued as permanent interest-bearing shares (Pibs) by several former building societies that the bank had snapped up over the years, including Halifax and Cheltenham & Gloucester.

They had been very attractive to risk-averse pensioners in particular, with generous annual yields of up to 16 per cent, and the promise of the return of all their capital.

But at the height of Lloyds’ cash crisis in 2009 it converted the Pibs to ECN bonds which counted towards Lloyds’ capital reserves.

The move helped shore up the bank’s capital position at a crucial time as it was able to transfer the £8bn value of the bonds on to its balance sheet.

The final ruling on the case upheld Lloyds buy back of the bonds at par with investors not receiving income at the up to 16 per cent interest rates.

The bonds were the subject of a court battle last year, after Lloyds said it would redeem them at face value, which investors contested was against the product terms.

Lloyds won the case in December, although investors were thought to be seeking the right to appeal.

The enhanced capital notes were sold to retail investors around the time of the financial crisis. They pay out between 6 and 16 per cent and would have cost the firm around £200m over the next five years.

Lord Neuberger, who announced the judgement, said: “I would dismiss the trustee’s appeal, on the basis that I consider that a capital disqualification event has arisen.”

The dissenting judges Lord Sumption and Lord Clarke said: “These were long-dated securities, which cannot have been intended to be redeemed early except in some extreme event undermining their intended function and requiring their replacement with some other form of capital.”

A statement issued by Lloyds Banking Group said: “The Supreme Court has today handed down its decision in respect of the interpretation of certain terms of the enhanced capital notes and found in the group’s favour.

“The Court held that a capital disqualification event, as defined in the conditions of the ECNs, has occurred.

“Throughout the process the group has sought to balance the interests of all stakeholders and the group welcomes this decision from the Supreme Court.”