To meet concerns that hybrid debt failed to absorb losses.
Lloyds Banking Group Plc, the UK’s biggest mortgage lender, will issue about $13 billion of enhanced capital notes, new securities designed to meet concerns that hybrid debt failed to absorb losses.
The London-based bank is exchanging some junior debt for 6.99 billion pounds ($11.6 billion) of ECNs that convert to equity in certain circumstances, plus 1.48 billion pounds of securities that may take the form of ECNs, new shares or cash, it said in a statement on Monday. Under a swap of its US securities, Lloyds will issue as much as $985.6 million of ECNs, up from the $800 million planned.
The ECNs, also known as contingent convertible core Tier 1 securities, or CoCos, become equity if the bank’s core Tier 1 ratio falls to less than 5 per cent, a feature that allows them to be treated as core capital for regulatory purposes. Lloyds is offering higher interest than on existing notes, as well as fixed maturities and mandatory coupons.
“This doesn’t tell us a lot about whether there’s a huge new market for these securities,” said Gary Jenkins, head of credit research at Evolution Securities Ltd in London. “This is an exchange for impaired bonds. An exchange for cash by a healthy bank would be the real test.”
Lloyds accepted 8.78 billion pounds of securities for exchange under its non-US offer, while $2.7 billion of notes were tendered in the US exchange, Lloyds said. The bank is seeking to bolster capital to avoid the UK government’s Asset Protection Scheme.
Lloyds’s CoCos are an alternative to hybrid securities, which have elements of debt and equity. Banks issue the subordinated notes to raise capital as a cushion against losses to depositors and senior creditors.
Regulators have grown critical of hybrid notes as a form of capital for banks after money-losing lenders, concerned about losing access to capital markets, were reluctant to stop discretionary coupon payments on the securities. CoCos mean Lloyds doesn’t choose when to raise equity in a crisis because the conversion to stock is triggered by its published capital ratio.
The regulators’ analysis of the weakness of hybrid bonds is at odds with ratings firm Moody’s Investors Service. Hybrids are “highly susceptible to losses due to their unique equity-like features,” analyst Barbara Havlicek at Moody’s in New York, said in a report.
Moody’s said last week it will no longer assume that holders of the securities will benefit from government support to shore up troubled lenders.
CoCos aren’t a “panacea” for lenders’ capital needs, which will have to be addressed in other ways, according to Standard & Poor’s.
The notes may not translate into equity early enough to help the issuer, S&P said. They may also not be attractive to investors at a price that meets the issuing bank’s needs, according to the New York-based ratings firm.
