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Thursday, 23 November 2017

EMEA Financial Bond: Lloyds’ £5bn-equivalent multi-currency AT1 exchange

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In a year when bank capital dominated the financials arena, a transaction had to provide something extra to stand out from the pack.

Innovative models for mutuals, mammoth multi-currency offerings and the first investment-grade CoCos all debuted during the IFR awards calendar year, but it was Lloyds’ handling of a complex capital problem that captured the attention of the market.

“If there were an award for displaying superior knowledge, I think it would have to go to the Lloyds ECNs,” said a banker not even involved in the project. “The whole market was obsessed with that transaction, and in one way or another I think every house was involved, whether they were mandated or not.”

Indeed, the £5bn-equivalent exchange offer for 33 ECNs across the euro, sterling and US dollar markets had been years in the making.

In 2009, when the bailed-out lender first issued ECNs, it was in a dire situation, and the deal helped the bank get back on its feet by injecting much needed capital.

But Lloyds understandably began weighing up its options earlier this year when it turned a profit. Given that the notes were unlikely to count towards stress test capital due to their 5% trigger – below the 5.5% required by the EBA – management decided something needed to be done.

There were lots of moving parts to the offering. Retail investors had to be cashed out, while bondholders that had helped the bank when it was on its knees needed to feel they were not being short-changed.

On its results call in February, Lloyds faced an anxious pack of investors desperate to know the fate of the ECNs that in some cases rewarded them with coupons of over 10%.

But lead managers Lloyds, Bank of America Merrill Lynch, Goldman Sachs, Deutsche Bank and UBS ensured that by the end of the process, the bank was able to switch investors into securities with a much higher risk profile – including coupon deferrals and a higher trigger. Expert planning and discussions with accounts allowed it to upsize the transaction by £350m.

The results spoke for themselves. Lloyds achieved an 81% take-up from investors keen to avoid a potential regulatory call at face value down the line. The coupons ranged from 6.375% to 7.875%, compared with the average yield of 9.3% on the ECNs.

Institutional investors agreed to exchange £5bn of the ECNs for around £5.35bn of new bonds.

And Lloyds issued the largest amount of Additional Tier 1 bonds ever in a single day, accounting for around a quarter of the size of the entire market at the time.

To see the digital version of the IFR Review of the Year, please click here.

To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.com.

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