Lloyds investors asked to redeem bonds

Hundreds of thousands of Lloyds Bank bondholders have been asked to surrender annual income payments of up to 16 per cent and sell their investments back to the bank.

The part-nationalised lender wants to buy billions of pounds worth of bonds from investors because it is worried they will not count as “core capital” under new European rules.

Lloyds says it is willing to pay “market prices” so investors will not lose out, but campaigners argue that private investors are being offered a poor deal. Unlike institutional investors, who can swap their old bonds for new ones, private investors are only being given the option of a cash buyout.

Most of the 120,000 individual investors who hold the bonds originally bought Halifax or Cheltenham & Gloucester income products called permanent interest bearing shares (Pibs) and preference shares. They were encouraged to swap these for new “enhanced capital notes” (ECNs) as part of a previous restructuring.

The ECNs start out as bonds paying income, but can turn into shares if the bank’s capital falls below a certain level. In the case of Lloyds that level is 5 per cent.

Unlike the old investments, which carried on paying out indefinitely, the ECNs came with a expiry dates of up to 15 years. Annual coupon payments were a little better, however, ranging between 6.385 per cent and 16.125 per cent of par value.

Lloyds needed investors to accept that deal so that it could bolster its capital after a government bail out and told investors that if they did not swap they faced a suspension of coupon payments for up to two years.

Now, it wants private investors to cash out of the ECNs because it is unclear whether they still count as capital that a bank can use to cushion itself against problems.

If investors do not sell up, Lloyds has warned that it has the right to buy the investments back at their face value later on.

The attempt to force a sale or swap of these products is not surprising, said Daniel Reynolds, manager of the Guardian Permanent Income Fund. “Lloyds is being prudent. The sticky thing is the difference in the deal offered to retail investors and institutional ones. The deal for retail investors isn’t necessarily a bad one, but you will lose the income payment.”

At the moment, the 22 issues created in 2009 are trading at prices above par, meaning that investors who had the bonds when they were issued would make money if they sell now. Bondholders have to make their choice between March 20 and April 16.

Mark Taber, an independent investor activist who is fresh from his victory representing Co-operative Bank bondholders, said the offer is unfair. The price of the investments has fallen recently, he said, and the terms of the deal are complicated. This would be bad enough, but retail investors are not being represented in talks with the bank.

“Lloyds says it has the right to buy back at par, but that’s contentious. Lloyds should at least get an independent opinion on the deal,” he said.

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The offer to institutions is also, he believes, 10 per cent higher than that available to retail investors, who may also be disadvantaged by the tax treatment of any redemption gains.

This week, Mr Taber wrote to the chief executive of the UK’s financial regulator, the Financial Conduct Authority, pointing out that the previous regulator was involved in structuring the products in the midst of the financial crisis and was well aware that retail investors were being coerced into holding them.

“I call on the FCA to make it clear that it will not approve the retail offer as fair until retail investors have been afforded proper representation to address the issues and an independent assessment of the fairness of the offer terms has been performed.”

Rik Edwards, fixed-income specialist at broker Canaccord Genuity, disagreed with this assessment. “Lloyds is pointing out that they have the right to repay investors at par if the bonds no longer qualify as core capital,” he pointed out. “I don’t see that they have done anything wrong.”

If investors do sell, they are unlikely to find similar investments offering the same level of income. Nationwide recently launched a new hybrid bond with a coupon of 6.875 per cent. However, the minimum investment is 100,000 bonds, putting them out of reach of most people.