Lloyds urged to avoid "irresponsible" bond buyback

By Steve Slater

LONDON, Feb 25 (Reuters) - Lloyds Banking Group hasbeen urged by a campaigner for retail investors not to be"irresponsible and short-termist" over how it treats bondholderswho helped to rescue the bank in the financial crisis.

The British bank, which is 33 percent owned by UK taxpayers,told investors this month that it could buy back at face valuethe 7.5 billion pounds ($12.5 billion) of bonds it issued tostrengthen its capital in 2009 because new European rules meanthat they are now unlikely to count towards its capital buffers.

With the bonds trading at a premium to their issue price,investors fear they could be short-changed by an enforced sale.

Mark Taber, who has previously led successful campaigns forretail bondholders in Bank of Ireland and Co-operativeBank, said in a letter to Lloyds on Tuesday that it "would beirresponsible and short-termist" of the bank to call in theenhanced capital notes (ECNs) on the basis that they no longercount as qualifying capital for European banking stress teststhis year.

"If Lloyds considers there is an issue with the capitalstatus of the ECNs, then it should be engaging openly andconstructively with all stakeholders in order that a consensualsolution can be reached," the letter said.

With up to 123,000 retail investors holding the ECNs, Tabertold Reuters last week that there was mounting concern aboutcomments the bank made to analysts on Feb. 13. Bond prices fellafter the comments.

Banks can save annual interest costs by buying backhigh-yielding bonds, leading many to take a harder line on theissue. However, upsetting bondholders including hedge funds andother big investors could prove damaging for future fundraisingand analysts said Lloyds is unlikely to offer the bare minimum.

Taber said that investors had not been made aware of therisk that the bonds could be called in because of regulatoryissues.

His letter said the ECNs had been structured in extensiveconsultation with the UK regulator to meet Lloyds' long-termcapital requirements. To disqualify them now because of a changein the definition of capital "directly contradicts thehistorical basis for the terms and the understanding on whichthey were exchanged", he said.

Taber sent the letter to Charles King, Lloyds' head ofinvestor relations, who was on the Feb. 13 call, and sent copiesto senior UK regulators and politicians.

A spokesman for Lloyds said it maintains contact with arange of stakeholders but does not comment on individual cases.