Lloyds Banking Group has angered its bondholders with a plan to redeem at par £700 million of so-called enhanced capital notes it issued as part of its 2009 recapitalisation following its disastrous acquisition of HBOS. Bondholders are angry because the notes, with coupons of between 6.4 and 16.1%, have been a boon while rates are low. They are also upset by Lloyds’ reading of the terms. The bank says it can call the notes at par if there is a “capital disqualification event” — for example if they “cease to be taken into account” in its core tier one ratio. Roll forward to last year’s tests by the Prudential Regulation Authority, the FSA’s successor, and capital metrics and definitions have changed. Its stress hurdle rate was a common equity tier one (not the same as core tier one) capital ratio of 4.5%. Lloyds passed, with a ratio of 5% — without the ECNs. They were not disqualified, just not needed. Yet it is hard to avoid the impression that the bank is using the tests (and the PRA’s blessing to call the notes) to justify redeeming costly debt. BNY Mellon, trustee for the notes, wisely wants a declaratory judgment on the ECN terms from the court. Lloyds, with £12 billion already set aside for payment protection insurance claims, can ill-afford reputational self-harm.
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