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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