Blow for investors as Lloyds wins Supreme Court enhanced capital note bond case

Supreme Court rejects appeal by enhanced capital note bondholders who claimed Lloyds had treated them unfairly.

Lloyds Banking Group has won a major court case against a group of rebel bondholders, who will lose out on hundreds of millions of pounds in interest as a result.

The enhanced capital note (ECN) bondholders, many of whom are pensioners, had appealed to the Supreme Court claiming that Lloyds had treated them unfairly by forcibly repurchasing the high-paying bonds at face value.

However, the court rejected their appeal, ruling that the bank had been entitled to repurchase the bonds, which had offered annual yields of up to 16%.

In effect, it means the investors have missed out on as much as £800 million.

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Background to the ruling

It marks the end of a protracted battle between the ECN bondholders and the banking group.

The bonds were originally sold as permanent interest bearing shares, or Pibs, offering attractive returns by building societies such as Halifax and Cheltenham & Gloucester that Lloyds subsequently bought. In 2009 Lloyds converted the shares to ECNs, which helped during the financial crisis as the ECNs were included on its balance sheet.

However, they weren't counted as being part of the group's capital reserves in a 2013 stress test by regulator the Prudential Regulation Authority.

Lloyds therefore argued in 2014 that it was entitled to repurchase them at face value, citing small print in the terms and conditions of the ECNs that permitted it to do this in the event of a "capital disqualification event".

Blow for investors as Lloyds Banking Group wins enhanced capital note (ECN) bond court case

What the Supreme Court said

David Neuberger, president of the Supreme Court, stated: "The view is that the ECNs must play a part in enabling [Lloyds Banking Group] to pass the [regulator's] stress test.

"Under the regulations passed in 2013, the ECNs cannot be taken into account so as to do the very job for which their convertibility was designed, namely to enable them to be converted before the regulatory minimum Tier 1 [capital] ratio is reached.”

The latest ruling represents the end of this particular legal battle, with the Supreme Court voting 3-2 in favour of Lloyds.

What the bondholders said

Alexis Brassey, part of the management team at Cavendish Legal Group which was involved in the bondholders' battle, told the Telegraph that such a narrow result showed the issues in the case were far from clear.

He added: "The broader issue for the bond market, which was not raised in this case, relates to the fact that additional contract uncertainty must now be factored into pricing of certain financial instruments.

“Lloyds investors will now be considering options in respect to further action."

What Lloyds Banking Group said

A Lloyds spokesperson said the bank welcomed the decision.

They added: "Throughout this process, 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.”

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