Lloyds Banking Group is set to appeal a court decision which found that the lender cannot refinance costly securities issued in the wake of the financial crisis.
Failure in this appeal would mean losing out on a benefit of around £200m annually over the next five years.
The case stems from 2009, when the lender issued £8.3bn of enhanced capital notes to help recapitalise the group, with about £3.3bn left outstanding after they were exchanged into shares and cash last Spring.
The instruments pay a bond-like income, but switch into equity if the bank’s capital buffer falls below a certain level.
Both institutional and retail investors snapped them up following the crisis, but in December Lloyds redeemed about £700m of the bonds at par value after it passed the Prudential Regulation Authority’s stress test.
The notes were not taken into account under the Bank of England stress test in 2014, which the group stated was a ‘capital disqualification’ event. Earlier this year, the bank had received permission from regulators to redeem some of the notes.
Investors, who believe the bonds are worth more than par value, took the bank to court at the end of March. The outstanding notes carry rates of interest as high as 16 per cent.
In a stock exchange statement earlier today (3 June), Lloyds said that the Chancery Division of the High Court found that this “capital disqualification” event had in fact not taken place.
The bank said the judgement concluded that the notes “may still be taken into account for future stress tests”. Lloyds’ statement read that the notes were “originally structured with a conversion trigger in excess of the then minimum regulatory requirements”.
Changes to what is classified as ‘core capital’ mean that the conversion trigger for the notes is now equivalent to 1 per cent of common equity, which the bank said was far below regulatory thresholds.
“The judge agreed with the group’s view that it is correct to interpret the definition of core capital for the purposes of the capital disqualification event clause based on current regulatory standard,” stated Lloyds.
“However, the judge concluded that despite the fact that the enhanced capital notes were not taken into account for the most recent stress test applied by the PRA, the enhanced capital notes may still be taken into account for future stress tests and therefore a capital disqualification event had not yet occurred.”
It expressed disappointment in the decision, but said regardless of the outcome, its net interest margin for 2015 will exceed circa 2.55 per cent, in line with current guidance.
peter.walker@ft.com
