16th June 2016
Lloyds Bank has won the backing of the Supreme Court for its redemption of £3.3 billion of Enhanced Capital Notes . The notes are basically bonds paying a high interest rate of interest, which were convertible into shares, if the bank’s capital ratios fell to a certain level.
However the judgement handed down by the Supreme Court was not unanimous, passed with a 3-2 majority. Details of the judgement are available here.
The bondholders who bought the case against Lloyds, many of whom were retail investors, did so because they were quite happy receiving interest of over 10% a year, and did not want Lloyds to redeem their bonds.
However Lloyds argued that the bonds no longer formed part of their capital for the purposes of regulatory stress tests, and so due to a provision in the terms of the bonds, Lloyds were entitled to redeem them.
Lloyds lost the original court judgement, but this ruling was overturned in the Court of Appeal. Today’s Supreme Court judgement is the final say on the matter, as it is the final court of appeal in the UK.
If the judgement had gone the other way, Lloyds may well have been on the hook for compensating bond holders for their notional losses.
The Enhanced Capital Notes were issued by Lloyds in 2009, and were a form of ‘Coco’ – contingent convertible debt. In the first use of new consumer protection powers in August 2014, the FCA banned the sale of Cocos to retail investors, restricting their use to professional, institutional and sophisticated investors only.
Laith Khalaf, Senior Analyst, Hargreaves Lansdown says: “Lloyds has won the day, but it was a really close run thing. Lloyds shareholders will breathe a sigh of relief that a whole new avenue of redress has not opened up, just as the cost of PPI claims is coming to an end.
“Bondholders have basically lost out on future interest payments as a result of a shifting regulatory landscape, which encouraged the use of hybrid debt to bolster banks during the financial crisis, but has since seen new standards being set.
“The tangled web of terms and conditions the court has had to unpick demonstrates the complexity of hybrid debt securities, which is why the financial regulator has now restricted their sale to sophisticated investors only.”