Fresh off the London Stock Exchange, more Lloyds CoCos (that’s Contingent Convertibles) for everyone:
EXCHANGE OFFERS – MAXIMUM ECN NEW ISSUE AMOUNTS
On 3 November 2009, Lloyds Banking Group plc (“Lloyds”) announced two Exchange Offers relating to certain Existing Securities for Enhanced Capital Notes guaranteed by Lloyds or Lloyds TSB Bank plc, or, in the case of the Non US Exchange Offer only, an Exchange Consideration Amount to be satisfied in new shares and/or cash and/or additional ECNs.
As a result of high levels of investor interest following the 3 November 2009 announcement, Lloyds has decided if required, to utilise the maximum flexibility incorporated in the Exchange Offers Proposals to satisfy potential investor demand by increasing the Maximum ECN New Issue Amount under the Non US Exchange offer from £5.5 billion to £7.0 billion. In the event that take-up under the Non US Exchange Offer does not reach £7.0 billion, Lloyds will consider increasing the Maximum ECN New Issue Amount in the US Exchange Offer in accordance with its terms.
All other terms of the Proposals remain unchanged. Capitalised terms used, but not defined, in this announcement shall have the meanings given to them in the Exchange Offer Memoranda dated 3 November 2009 relating to the Exchange Offers.
What’s the reasoning behind the increase?
Gary Jenkins from Evolution Securities has an idea:
Lloyds have announced it may increase the amount of ECN’s it issues to a maximum of £7bn - Seems like they have listened to investors comments regarding the waterfall and which bonds may miss out and are trying to do the right thing for bondholders.
The ‘waterfall’ is basically the priority list for the Lloyds’ exchange offers to switch some of the banking group’s hybrid bonds for the new contingent capital (or ECNs according to the bank) and/or shares. As an example, holders of Lloyds’ bond XS0156372343 rank 39th on the list for exchanging into new ECNs, but they are first on the list for opting to exchange into shares.
Apparently this had some investors — particularly at the retail end of the spectrum — in a CoCo kerfuffle, confused as to why their brokers were refusing to allow them to tender for the ECN offer.
The official explanation from Lloyds went something like this:
On the topic of the exchange priority list or waterfall, an exchange priority has been introduced to maximise certainty for investors and to encourage a rational and orderly secondary trading market. The ranking is based on a number of criteria. Whether the security is a retail or institutional bond is not one of those criteria. Preference shares are ranked higher on the list for exchange into ECA, whereas upper tier 2 capital securities, i.e. bonds that are senior to tier 1 securities (including preference shares), are higher on the list for exchange into ECN. Unfortunately any prioritisation will leave some investors unsatisfied but it was deemed that a priority list available to investors was more clear and transparent for investors than a free-for-all with pro-rata allocation.
Related link:
I should not have CoCo-ed? – FT Alphaville
Stability concerns over CoCo bonds – FT
Contingent capital comes to pass, with a little help from the EC – FT Alphaville
CoCo nuts – The Economist