Lloyds swaps defunct capital tool for cocos
LLOYDS is bolstering its capital position by offering investors a new contingent convertible (coco) instrument in exchange for older securities.
The bank issued enhanced capital notes (ECNs) in 2009 to boost its capital buffers. But it now fears regulators will rule them ineligible as additional tier one (AT1) capital, the type the bank wants.
As a result it is offering institutions cocos paying a coupon of between 6.375 per cent and 7.875 per cent.
If the bank’s core capital ratio falls below seven per cent, the cocos will convert into shares.
Ratings agency Fitch has given the cocos a double-B minus rating meaning they just squeeze into the investment grade category.
Retail investors will be offered cash.
Not all of the ECNs will be included in the swap – Lloyds wants to raise up to £5bn with cocos, compared to the outstanding £8.4bn of ECNs.
If the swap to cocos is oversubscribed, investors can either take cash, sell the securities or continue to hold ECNs.
The move will boost Lloyds’ leverage position by 0.5 percentage points, as well as improving its interest margins.