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By Helene Durand
LONDON, April 2 (IFR) - The hysterical anger from investorsafter Lloyds announced this week it had won permission to redeemearly high-coupon capital issued during the darkest days of thefinancial crisis was predictable but not justified.
Lloyds raised the Enhanced Capital Notes (ECNs) when it wasin dire straights in 2009 but regulators have moved thegoalposts substantially since, meaning the bonds are no longeran efficient capital instrument.
Redemption makes complete sense. The lowest yielding ECNlisted for a call at par pays a 6.439% coupon, the highest16.125%. Fortunately for Lloyds, the bonds included a clause(capital disqualification event) that allow it to retire thenotes at par in this very circumstance.
In a world of low or even negative yields, it is littlewonder bondholders are unhappy at losing such juicy yields. Now,some investors say that Lloyds should leave the notesoutstanding, or at least pay them market prices, as they knewnothing of this clause.
It's hard to believe them. Especially as last year Lloydsapproached all ECN holders and offered to buy or swap thesecurities in a jumbo high-profile liability managementexercise.
Institutions were swapped into new Additional Tier 1securities, while retail investors were offered cash only, withthe UK regulator deeming AT1 an unsuitable investment for them.
And none of this was below the radar. In fact, rather thancash, some retail investors wanted the AT1 option which,although high-risk, pays a fat coupon.
It would seem that those that refused the cash were largelybetting the UK lender would rather avoid a confrontation with"disgusted of Tunbridge Wells" types.
These investors need to stop playing dumb. This is abailed-out bank here.
The irony is that the EU, as a condition of the bailout, wasinsisting that the bank turn off the coupons on the pre-crisissubordinated debt these ECNs were created out of.
So, instead of receiving nothing, they have made hay in thesun since the ECNs were issued.
Bond investors have forgiven far greater than this since thecredit crisis, suggesting that the threat of reduced marketaccess in the future is nothing but an empty threat.
Furthermore, Lloyds has been fair to all, including toinstitutional investors who matter most for wholesale funding.
So, time for Lloyds to show that bonds' terms and conditionsare worth the paper they're written on. (Reporting by Helene Durand, Editing by Alex Chambers, PhilipWright)
