Lloyds risks revolt over buy-back

Lloyds told investors last week the £7.5bn of bonds it issued to strengthen its capital in 2009 are now unlikely to count towards its capital buffers under new European rules, potentially making them worthless.

Lloyds said it could “call” them or buy them back at near their face value, sending the value of the bonds tumbling. With more than 100,000 retail investors holding them, Lloyds could face a legal challenge, making it “very messy” for the bank, Mark Taber, a campaigner for retail bondholders, said. Mr Taber has already led successful campaigns for retail bondholders in Bank of Ireland, Co-operative Bank and Lloyds in the last five years.

“Lloyds were surprisingly aggressive in the tone they took, and since then I’ve had a lot of calls on it,” Mr Taber said.

Lloyds is not alone in hardening its stance on high-interest paying bonds that may no longer have any use in bolstering capital. Credit Suisse this month fired a similar warning shot. Banks, eager to increase earnings and dividends, are having to look at all options to improve margins in a low interest rate environment.

“As regulators are becoming clearer and old-style (bonds) instruments are increasingly expensive to maintain, regulatory calls are getting more and more attractive to issuers,” BNP Paribas credit analyst Gildas Surry said in a note this week.