Lloyds Legacy Tier 1 Par Regulatory Call
Lloyds unexpectedly called legacy Tier 1 instruments. Given redemption, investors should look to deploy cash quickly given the high coupon on this instrument. Please speak to an IAM sales representative for HY opportunities.
In January 2022, Lloyds announced regulatory calls on four legacy Tier 1 instruments that no longer qualify as additional Tier 1 (AT1) capital from 1 January 2022. The most notable bond was the 12% USD1.9bn that had a first call in December 2024.
Table 1. Lloyds Banking Group Legacy Tier 1 Regulatory Calls
|Issuer||Coupon||Amount (GBPm)||Outstandings||First Call||Par Regulatory Call|
|Bank of Scotland||7%||150||18||31/05/2026||3/02/2022|
Source: IAM Capital Markets
There have only been a handful of par regulatory calls from European and US banks. So, a par regulatory call from Lloyds was always going to be a somewhat unusual event for financial markets.
Furthermore, a USD2bn deal is a hefty load to refinance, let alone refinancing in volatile markets. Lloyds must inevitably be comfortable with its ability to access the T1/T2 market over the next few years, otherwise it would not have gone down this path.
The three main drawbacks to this bond, from Lloyds’ perspective, were:
- It was issued by Lloyds Bank (OpCo) and does not count as MREL/TLAC from 2022
- It is not Basel III compliant as AT1
- It has a high coupon of 12%
Chart 1. Comparative Returns for Lloyds Perps Versus US HY Index
Although the action was somewhat unexpected, the bond price had been gradually migrating towards 100px given the reasonable probability of a par regulatory call. Over 2021, the bond price fell around 14% − translating into a negative bond return of around 3% (on an unhedged annualised basis). However, an investor’s return would have comprised both a bond as well as a currency return. Thus, given the 10% depreciation in the AUD/USD over the year, investors would have received a positive total return of around 7% (on a hedged annualised basis).
Chart 2. Lloyds Perps Price History
Most other legacy Tier 1s with par regulatory calls have now been redeemed (remember: BNP also exercised a par regulatory call recently). One of the few ones that comes to mind is the NatWest USD1bn Perp (US639057AA62 − now US Libor +232bps), which has a first call in September 2027, with a par regulatory call that is now exercisable. There are still a few legacy Tier 1s outstanding, perpetual or with long-dated calls, that have no regulatory call, or a make-whole call.