Lloyds backed by Supreme Court in £1bn bondholders case

A man walks past a Lloyds Bank branch Image copyright Reuters
Image caption Lloyds wins court battle against bondholders

Lloyds Bank has won a major court battle against bondholders that could save it up to £1bn.

Rebel investors had fought for years against forced repurchase of enhanced capital note (ECN) bonds.

But the Supreme Court said the bank had been entitled to buy back the bonds at their original issue price.

The move means investors, who had originally bought bonds issued by mutuals, get lower payouts and lose out on future returns.

A Lloyds Banking Group spokesperson welcomed the decision: "The Group has sought to balance the interests of all stakeholders including our 2.6 million shareholders, as it takes steps to meet the requirements of the changing regulatory landscape and manage its capital requirements efficiently."

Building societies

The bonds had originally been issued as permanent interest-bearing shares (Pibs) by several former building societies that the bank had snapped up over the years, including Halifax and Cheltenham & Gloucester.

They had been very attractive to risk-averse pensioners in particular, with generous annual yields of up to 16%, and the promise of the return of all their capital.

But at the height of Lloyds' cash crisis in 2009 it converted the Pibs to ECN bonds which counted towards Lloyds' capital reserves.

The move helped shore up the bank's capital position at a crucial time as it was able to transfer the £8bn value of the bonds on to its balance sheet.

But, crucially, in the terms and conditions of the ECNs, it said that the bank could buy back the notes at "par" - face value - if a so-called "capital disqualification event" occurred.

Capital disqualification

In 2014 Lloyds began offering to buy back the bonds at market value ahead of maturity dates of between 2019 and 2029.

But in December 2014 during a stress test by the Prudential Regulatory Authority the ECNs did not count as capital.

Lloyds subsequently announced that a capital disqualification event had occurred allowing it to buy back the bonds at their original issue price.

Bondholders were angered as the bonds traded at a higher level than their face value, plus they faced losing out on future returns.

They disputed the bank's claims that the bonds had been disqualified as capital and took the case to the High Court.

Court cases

In 2015 the High Court found in favour of the bondholders with Sir Terence Etherton, the head of the Chancery Division, rejecting Lloyds' argument on the basis that the bonds could still be taken into account in future stress tests.

But the Appeal Court overturned the verdict in the Spring and the Supreme Court has now upheld that decision.

Lloyds began redeeming the bonds after the Appeal Court ruling and remaining bondholders will now get paid the face value of their holdings.

The bank expects to save on interest payments worth £200m each year. The move had originally been aimed at saving five years' interest - £1bn - but the delay in redeeming the notes means that is likely to be reduced to four years.

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