Lloyds wins Supreme Court case over high-interest bonds

The UK Supreme Court has ruled in favour of Lloyds Banking Group in a long-standing dispute over whether the bank was within its rights to buy back high-yielding bonds at par value.

Lloyds said on Thursday that the Court had rejected an appeal by bondholders who argued that the redemption of £3.3bn in bonds at face value should not be allowed.

“Throughout the process the group has sought to balance the interests of all stakeholders and the group welcomes this decision from the Supreme Court, which confirms the occurrence of a Capital Disqualification Event and supports the group's redemption of all series of enhanced capital notes using the Regulatory Call Right earlier this year,” it said.

The ECNs – which paid high annual interest of 6% to 16% – were issued by the bank in 2009, not long after it was rescued by the government, as it looked to prop up its capital buffer.

Investors had argued it was wrong for Lloyds to buy the bonds back early at par as the terms in the prospectus did not allow this. However, the Supreme Court ruled that it was ok for Lloyds to redeem the bonds early as they no longer counted towards its capital buffer.

In the terms of the bonds, Lloyds included a condition stating that they could be bought back at face value rather than their secondary market price – the bonds were first sold for 100p but later traded on the second market for much more – if a capital disqualification event took place, which in a nutshell refers to whether the bonds count as part of the bank’s core capital.

“Lloyds has won the day, but it was a really close run thing. Lloyds shareholders will breathe a sigh of relief that a whole new avenue of redress has not opened up, just as the cost of PPI claims is coming to an end,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.

“Bondholders have basically lost out on future interest payments as a result of a shifting regulatory landscape, which encouraged the use of hybrid debt to bolster banks during the financial crisis, but has since seen new standards being set.

“The tangled web of terms and conditions the court has had to unpick demonstrates the complexity of hybrid debt securities, which is why the financial regulator has now restricted their sale to sophisticated investors only.”

At 1130 BST, Lloyds shares were down 1.1% to 62.28p.