The UK Supreme Court has ruled in favour of Lloyds Banking Group’s decision to call in more than £3bn of high income-paying bonds.
The investment terms meant that Lloyds could redeem the ‘enhanced capital notes’ early at face value, as they no longer counted towards the bank’s capital buffer.
Investors believed the bonds were worth more than par and the terms did not allow for them to be called in early.
A statement from the court explained that in March 2009, Lloyds failed a stress test carried out by the regulator, showing the group had a shortfall in core tier one capital.
Lloyds therefore implemented a strategy to raise the necessary core tier one capital, involving a rights issue and a restructuring of some of its securities as enhanced capital notes, which provided an advantage in the context of the regulator’s stress tests.
Although issued as debt instruments, they would convert automatically into fully paid-up ordinary shares if Lloyd’s core tier one capital ratio fell below a certain limit during a stress test.
The restructuring was carried out in November 2009 by way of an exchange offer memorandum sent to holders of existing securities, including around 123,000 retail investors.
Take up was 86 per cent and £8.3bn worth of ECNs were issued by the respondent issuers to a mixture of institutional and retail investors.
On the date when the application was filed, around £3.3bn worth of ECNs remained in issue.
On 16 December 2014, the regulator announced the results of a further stress test on Lloyds, declaring while the bank’s capital position required strengthening, the conversion trigger for the ECNs to become ordinary shares was not reached.
On the same day, the issuers declared that they had become entitled to redeem the ECNs prematurely pursuant to their terms because a “capital disqualification event” had occurred.
BNY Mellon Corporate Trustee Services objected and commenced proceedings seeking declaratory relief. The High Court found for the trustee, but the Court of Appeal allowed the issuers appeal.
In December, the Court of Appeal backed Lloyds’ request to buy back bonds issued to investors during the financial crisis, meaning the issuers will save around £200m annually over the next five years.
Investors were then thrown a lifeline in February, after the Supreme Court gave them the chance to appeal against the bank’s decision to buy back the ECNs at face value and stop paying as much as 16 per cent a year in interest.
However, the Supreme Court today (16 June) dismissed BNY Mellon’s appeal by a 3:2 majority.
Lloyds welcomed the decision in a short statement: “Throughout this process, the group has sought to balance the interests of all stakeholders including our 2.6m shareholders, as it takes steps to meet the requirements of the changing regulatory landscape and manage its capital requirements efficiently.”
peter.walker@ft.com
