Outcry as Lloyds wins battle of the bonds

The Appeal Court ruled yesterday that Lloyds was within its rights to force investors, including thousands of its own customers, to offer their bonds for repurchase after regulators decided that the debt would no longer count as part of its core capital, reports The Times.

Lloyds will be able to buy back the bonds for well below their market value, saving itself about £200 million in annual interest or just below £1 billion during the next five years.

A Conservative member of the Treasury select committee said that the result was horribly wrong, and described the bank’s behaviour as appalling. Mark Garnier added: “This is a clear example of a bank showing contempt for its smaller investors, and that does not ring true with a bank that is trying to clean up its act.”

Andrew Tyrie, the committee chairman, said that he would be writing to António Horta Osório, the chief executive of Lloyds, asking him to explain the bank’s actions.

“Small investors will have taken note of what has happened and a number of them may be very disappointed, to put it mildly,” Mr Tyrie said. “This doesn’t look good and I will be writing to the chief executive for an explanation of how Lloyds came to this decision.”

Lloyds brought the appeal after losing a High Court case when it tried to cancel £3.3 billion of so-called enhanced capital notes (ECNs). These were sold by the bank as part of its 2009 emergency recapitalisation and paid rates of interest of between 6 per cent and 16 per cent.

Some City fund managers said that the move to buy the bonds at their face value, which is substantially below their market value, amounted to “sharp practice” and questioned the wisdom of Lloyds pursuing a legal battle that set it against its own investors.

Gary Kirk, of TwentyFour Asset Management, said: “We were surprised that Lloyds decided to appeal against losing the first court hearing, although given the amount of disgruntled investors who needed to come out of the ECNs into the new regulatory AT1 [the replacement bond], maybe the management of Lloyds felt compelled to appeal in order to stave off a raft of investor litigation.”

Mark Taber, an investment specialist representing many of the ordinary investors, said that the ruling raised “serious consumer protection and market integrity issues” and that it showed the need for clearer regulation pertaining to disclosure requirements.

“Consumers should be able to rely on what is written in the terms they are offered. What Lloyds attempted in claiming they made a drafting mistake and seeking to rewrite the terms of the bonds for their own gain over five years after they sold them to over 100,000 of their small investors poses serious questions for both consumer protection and market integrity,” he added.

Lloyds welcomed the decision and said that it showed the bank had been correct to go ahead with its redemption of the ECNs.

Ian Gordon, of Investec Securities, backed the bank’s actions and said that it “should now play Scrooge” and put the likely savings at up to £350 million. “It [Lloyds] has options, and it is, we believe, time to put shareholders first.”

Mr Garnier questioned why the Treasury or UK Financial Investments, which manages the taxpayer’s 9 per cent stake in the bank, had not intervened. “This looks to be a case of smaller bondholders being screwed over to the benefit of the larger shareholders,” he said.