Bloomberg News

Lloyds Offers 34 Percent Discount in Subordinated Debt Swap

February 02, 2012

(Adds analyst comment in fourth paragraph.)

Feb. 2 (Bloomberg) -- Lloyds Banking Group Plc, the U.K.’s second-largest state-controlled lender, is offering to exchange junior bonds for new securities, valuing the existing debt at a 34 percent discount to face value to generate capital.

The London-based company is seeking to swap 415 million euros ($545 million) of undated Tier 1 bonds it can call from March this year, for new, more-senior Tier 2 securities due 2024. The exchange is taking place because it isn’t clear whether the old debt will qualify as capital under rules planned by the European Union, the bank said in a statement.

Lloyds is valuing the bonds in the exchange at about the market price, Bloomberg Bond Trader data show. The lender will decide whether to call bonds that aren’t exchanged “with reference to the prevailing regulatory, economic and market conditions at the time,” according to the statement.

“They aren’t paying up to do the deal,” said Hank Calenti, an analyst at Societe Generale SA in London. “Investors are faced with a decision whether to accept the exchange into the new bond with a more-certain maturity date or stay in what may possibly become a perpetual floater.”

Lloyds’s new bonds will pay an initial coupon of 8.5 percentage points more than the seven-year swap rate, currently 1.88 percent, according to the statement. After 2019 the coupon will be 8.5 percentage points more than the five-year swap rate if the bank chooses not to redeem the notes, according to the statement.

Repurchasing bonds at a discount, known as a liability management exercise, allows banks to crystallize a gain that bolsters their capital ratios.

--Editors: Michael Shanahan, Andrew Reierson

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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