Lloyds' boom-era bosses sue bank for bonuses

Lloyds faces another day in court over £1bn bond savings

22 December

Lloyds Banking Group is facing another court battle with bondholders in relation to its plan to substantially reduce interest payments over the coming years.

Earlier this month, the bank controversially won an appeal over its plan to redeem around £700m of 'emergency capital notes' issued at the height of the banking crisis, which pay as much as 16 per cent interest. This cleared the way for Lloyds to switch the investments at face value to standard bonds paying a single-digit rate of interest, saving around £1bn in repayments.

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As the trustee acting on behalf of the bondholders indicated it would not appeal again without financial guarantees, the bank said it would go ahead with the transfer once it had received the all-clear from the regulator, a consent that is seen as a formality. But the Daily Telegraph reports that funding has now been raised to continue the fight and that permission will be sought to take the case to the UK's highest court.

Mark Taber, a campaigner who has been involved in the case from the outset, said institutional and small investors had pledged support, and that £70,000 had been sent to the lawyers acting for the bondholders to launch the appeal. As much as £1m could be needed to cover the legal costs if the investors fail to win the case.

The bondholders' trustee, BNY Mellon Corporate Trustee Services, has told bondholders it "intends now to prepare, serve and file" the application to appeal to the Supreme Court.

The case is one of several factors, including ongoing costs relating to past wrongdoing, that has been dragging down Lloyds's share price in recent weeks. At a time when banks are seeing their stock fall, the state-backed lender has slipped below its 73.6p bailout break-even price, which has stalled the ongoing drip-feed disposal of the taxpayers' interest. This morning it was up 0.8 per cent at 71.5p.

Analysts at RBC still reckon the bank is a good pick for investors next year despite the recent slide. Institutional Investor notes the bank's analysts said Lloyds will benefit from a relatively low-risk retail funded balance sheet and this, combined with a boost from a discounted share offer to consumers, should support a strong rally to as high as 95p.

Lloyds's legal battle over bonds might not be over yet

17 December

Lloyds Banking Group bosses must have thought the legal battle regarding £1bn of bond interest payments was finally behind them.

Last week the Court of Appeal ruled in the bank's favour over its attempt to cancel a chunk of crisis-era debts, which pay astronomical interest rates of up to 16 per cent. The trustees of the bonds who brought the case on behalf of investors then said they would not take the case to the Supreme Court without assurances they would be indemnified against costs.

But now, says the Daily Telegraph, bondholders are piling in to pledge to cover the cost and allow the challenge to go ahead. One investor, Alexis Brassey, a lawyer who has been involved in the case, is organising an appeal for the £1m he reckons will be necessary to fund the appeal – and he says he is receiving emails pledging support "every few minutes".

In fact, yesterday afternoon he told the paper he should have sufficient funding promises in place to fund "an application for leave to appeal within 48 hours".

The case centres around loan notes issued to raise emergency capital in the teeth of the banking crisis in 2009. To incentivise investors to take part, Lloyds offered attractive interest rates in double-digits that would pay out for up to 20 years. It now wants to replace these at face value with standard bonds paying standard, low single-digit rates of interest. Over five years it stands to save £1bn.

Its justification is that the regulator said this year it could not count the bonds as part of its core regulatory reserve that are needed to pass so-called 'stress tests'. This, says the bank, breaches the terms of the bonds and constitutes a "capital disqualification event". Lloyds has already transferred several billion pounds' worth – but holders of bonds worth £700m have held out.

The High Court originally ruled in the bondholders' favour, citing vague terms that the bank itself has admitted were poorly written. The appeal court overturned this in a decision that one MP on the Treasury Select Committee has said was "morally wrong" (see below). An appeal to the Supreme Court could still swing a final vote against the bank.

"If the odds of success at the Supreme Court are 50:50, it's obviously very much in bondholders' interests to fund the appeal," said Brassey. "If the institutions don't cobble together the money for the appeal they almost deserve to lose."

Lloyds to save £1bn after winning bonds legal battle

11 December

Lloyds Banking Group has secured a major legal victory – and savings of around £1bn over the next five years – after Court of Appeal judges overruled an earlier verdict over high-paying crisis-era bonds.

The state-backed bank had originally been successfully sued by a group of small investors owning £700m of the 'enhanced capital notes', which pay stellar interest rates of up to 16 per cent over a range of timespans up to 2029. If it is now able to force investors to transfer the notes to more standard bonds, Lloyds could save £200m per year or £1bn over the next half-decade, says The Times.

The notes had been issued to raise much-needed capital at the height of the banking crisis in 2009, but were discounted by the regulator from 'stress tests' earlier this year. Lloyds reckoned this gave it sufficient reason to cancel them under a vague contractual provision allowing "early redemption for regulatory purposes", says the Times' Alistair Osborne.

He reckons that is wrong. "Lloyds saves £1bn for investors, pensioners get shafted and a bank with a £14bn PPI mis-selling bill looks as grubby as ever," Osborne rails.

Conservative members of the Treasury Select Committee are equally furious. Former investment banker Mark Garnier MP branded the outcome "morally wrong", while committee chairman Andrew Tyrie said the move "doesn't look good" for the bank and pledged to write to its chief executive "for an explanation of how Lloyds came to this decision".

On the other hand, some institutional investors were delighted with the outcome, which will boost the bank's bottom line. Ian Gordon, of Investec Securities, told the Times Lloyds should "now play Scrooge" and issue bonds that increase savings to £350m. "It has options, and it is, we believe, time to put shareholders first."

Investors in the wider market – who would be reacting mostly to the financial consequences – reacted positively as well, with the stock rising almost two per cent on Thursday. But the shares remain in the doldrums and below the 2008 bailout buy-in price at 71p.

And not all investors agreed with the banks' move, with some city fund managers questioning the wisdom of appearing to renege on a promise to investors. TwentyFour Asset Management said in a note entitled "Lloyds cancels Christmas" that the decision was "quite frankly very surprising", the Financial Times notes.

Lloyds share sale deadline extended after recent dip

04 December

The government remains committed to an exit from its stake in Lloyds Banking Group, but has admitted it will take longer than planned.

In an announcement today, the Treasury said it was going to complete the drip-feed sale of the state-backed bank, with the deadline extended to June 2016.

The final stage of the process, which could come before that end date if shares are offloaded faster than expected, will still be a discounted offer to the public.

The Daily Telegraph notes the government had previously set this month as the end point for the sale of shares to institutional investors, which has raised £9bn so far and has achieved an average price of 81p compared to a bailout buy-in price of 73.6p. The retail offer was thought likely to take place in March.

The deadline extensions come after a period in which Lloyds shares have struggled as the bank faced another increase in its costs related to past wrongdoing and the threat of its dividend being cut by increased capital reserves, demanded by the Bank of England.

This morning the stock was trading below the bailout break-even price at a little above 73p.

Criticism has been levelled at the government for proceeding with the retail share offer.

There are claims this will merely boost returns for private investors at the expense of taxpayers more widely, who might enjoy a better return from a continuation of what has been a successful disposal process.

But Chancellor George Osborne said: "As part of my plan to fully return Lloyds to the private sector, reduce public debt and build a stronger and safer financial system, Lloyds shares will also be offered to retail investors in spring 2016.

"This will allow hard-working people to buy a stake in our economy and help to build a share owning democracy."

The government owned 43 per cent of Lloyds at the peak of a two-part bailout worth around £20bn. It now owns a little more than nine per cent and has recouped more than £16bn in total.

Lloyds shares jump as capital clarity boosts dividend hopes

1 December

Lloyds shares have risen to their highest level in almost a month, after it became one of a number of banks to get the all-clear from regulators on capital reserves.

The stock had been mired below the 2008 bailout break-even price of 73p for most of November, as fears over a potential hit to future dividends in particular weighed on investors' minds.

Stress tests published today by the Bank of England were eagerly awaited for any sign that the bank might need to slow or stop payouts to investors to bolster back-up funds. In the event, however, regulators gave all of the participating banks a clean bill of health.

The tests modelled a scenario where Chinese GDP growth slowed dramatically and UK banks collectively took a £40bn profit hit related to past misconduct, says George Hay for Reuters. No bank breached the minimum capital deemed necessary to meet short-term running costs.

Royal Bank of Scotland and Standard Chartered did miss "some supplemental metrics", but overall the Bank of England stated the sector has moved out of the post-crisis phase.

Hay adds the report even suggested that the current average capital reserves level of 12.2 per cent – which Lloyds exceeds - is in line with long-term needs.

"Next year's pass mark will be higher: Barclays would have narrowly failed if held to 2016 thresholds, Bernstein analysts estimate," writes Hay. "But UK banks in general have been given more clarity on capital. For investors interested in when lenders might be able to sustainably pay dividends, that's welcome."

In particular, Richard Buxton, a high-profile fund manager with exposure to banking stocks, told Reuters: "Lloyds and Barclays are fine, with no material threats of further capital raising or, in Lloyds case, growing dividends over time."

This latter in particular has helped to lift Lloyds 2.7 per cent this morning to almost 75p per share, a level it was last at on 2 November. Barclays is doing even better, rising by 3.9 per cent, while Royal Bank of Scotland is up by 3.2 per cent.

Lloyds is still some way below its 2015 high of 89p in May – and is showing no signs of meeting the bullish expectations of some analysts and pressing on to 100p in the near future.

Concerns over whether the current valuation justifies such a price when significant risks, especially related to misconduct issues, remain.