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By Alice Gledhill
LONDON, April 1 (IFR) - Some of Lloyds Banking Group'sEnhanced Capital Notes (ECNs) have jumped in the secondarymarket, suggesting investors hope that a ruling on the legalityof the bonds' proposed early redemption will go against thebank.
The Group's 11.04% March 2020s were quoted at a cash priceof 102.65 on Monday, but have spiked to 105.71 on Wednesday,according to Tradeweb prices. Meanwhile its 7.5884% May 2020shave gained almost three points to 104 and its 9.125% July 2020saround a point to 103.5.
Lloyds on Tuesday received permission from the PrudentialRegulation Authority (PRA) to declare a "capitaldisqualification event" that would allow it to redeem the notesat par.
However, Lloyds will refrain from exercising the call forthe time being because the trustee, Bank of New York Mellon,acting on behalf of certain bondholders, is seeking a"declaratory judgment" that will decide if bondholders'contractual rights have been breached.
The disqualification event was triggered because the PRA didnot count ECNs as core capital for its stress tests, the resultsof which were published in December.
Bondholders are unhappy because the market placed a highervalue on the bonds before Lloyds announced the call, and becauseof generous coupons - in some cases as high as 16%.
Mark Taber of the website fixedincomeinvestments.org.uk, whohas been campaigning on the bondholders' behalf, hopes that thedeclaratory judgment will clarify the legality of the call.
The ECNs in question have a par value of around GBP700m.Taber believes that the majority are held by retail investors,although others have disputed this.
"The judgement is relevant to all ECNs, not just thosetargeted for redemption now, as it would be binding on all ECNs.The penny should now drop with institutional investors - whodidn't need to stick their head above the parapet until now -that they have an equal interest in the outcome," Taber said.
A Lloyds spokesperson said that the bank welcomed the PRA'spermission to call the notes and will work with the Trustee onthe declaratory judgment in order to provide certainty for allinvolved.
The bank has a total of around GBP3.3bn of ECNs outstandingfrom the GBP8.3bn that were sold at the end of 2009 as part of abroader recapitalisation.
Around GBP5bn were exchanged for cash or Additional Tier 1securities in March and April last year via a liability management exercise.
Lloyds is now reviewing different options for the remainingseries of ECNs.
"The un-exchanged ECNs left out of this process could wellsee another exchange, for example into holdco debt, with thealternative being the regulatory call," BNP Paribas analystswrote in a note on Tuesday. (Reporting by Alice Gledhill, Editing by Helene Durand andJulian Baker)
