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Thursday, 14 December 2017

Lloyds wins right to buy bonds back early to save £1bn

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  • Lloyds Banking Group office in central London

(IFR/Reuters) - Lloyds Banking Group will be able to buy back bonds early, potentially saving it about £1bn (US$1.5bn) in interest payments as a result of a court ruling.

Lloyds said on Thursday the Court of Appeal had unanimously backed its request to buy back bonds, called enhanced capital note (ECNs), from investors at their par value.

That should allow the bank to save on expensive interest payments worth £200m each year over about five years.

The decision overturned a ruling by a High Court judge in June, who said Lloyds could not buy the bonds back early.

Lloyds shares were up 1.6% by 1130 GMT, the top performing major European bank stock.

But prices on the bonds slumped in the secondary market, reflecting the expectation they would be bought back at par value. A US$328.95m bond that pays 7.875% annual interest, which is the biggest ECN Lloyds has said it wants to buy back, dropped by 10 points to 100.1 from 110.6, according to Tradeweb.

The ECNs were issued by Lloyds in 2009, shortly after it was bailed out with £20.5bn by the UK government, and pay high annual interest of between 6 and 16%.

The hybrid bonds convert into capital if the bank’s capital ratio falls. But Lloyds said new UK and European capital rules meant the ECNs would no longer count as core capital and so it wouldn’t provide the cushion they were supposed to, so it wanted to buy them back at face value.

Because of the high interest they paid, the bonds were popular among retail investors seeking higher yielding investments, and some hedge funds and asset managers. Some of the investors called on the courts to block the buyback, sparking a long-running dispute.

The bank issued about £8.3bn of the ECNs and has exchanged about £5bn worth of them for new instruments, leaving about £3.3bn of the notes outstanding.

Lloyds said on Thursday it intended to buy back £600m of the notes, as previously announced in December, most of which were due to mature in 2019/20. It will consider whether to buy back its other remaining ECNs.

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