An embarrassing UK Treasury screwup may have cost 120,000 Lloyds investors £2 billion in interest payments
GettyEveryone concentrated so hard on Lloyds Banking Group’s 2014 results announcement today that they missed one of the most embarrassing blunders made by Britain’s Treasury this year.
In a regulatory statement, the UK Treasury admitted that fat fingers were to blame for it telling Lloyds that it had permission to buy back a type of bond that helped keep it afloat during the credit crisis.
Lloyds received £20.5 billion in state handouts between 2008 and 2009 following the credit crisis. In return, the government took a 23.9% ownership stake in the bank. Lloyds therefore has to get permission from the government to buy or sell certain financial products, or pay dividends to shareholders. It also needs the government’s permission to buy back the bonds (called “Enhanced Capital
Sir Nicholas Macpherson, Permanent Secretary, HM Treasury revealed in a regulatory statement that the government made a huge blunder regarding the correspondence on Lloyds’ ECNs:
“Due to a clerical error at HM Treasury, incorrect information regarding ongoing regulatory decisions by the Prudential Regulation Authority (PRA) has been included in correspondence to certain individuals and sent out under electronic signature.”
“This information is in relation to Lloyds Banking Group’s application to the PRA for permission to redeem certain series of its Enhanced Capital Notes (ECNs), as disclosed by Lloyds Banking Group on the 16th December 2014.”
“HM Treasury incorrectly informed those it wrote to that the PRA had approved Lloyds’ application to call the relevant series of notes. HM Treasury understands that the PRA has not yet made a decision regarding whether to approve Lloyds Banking Group’s application. We apologise for this error, and sincerely regret any problems caused.”
ECNs- more commonly known as CoCos (Contingent Convertibles)- were sold to around 120,000 retail customers in 2009. The bonds were used as an emergency measure to stop it having to ask the state for more bailout cash.
It enticed thousands of customers to invest by paying an annual coupon of between 6.385% and 16.125%. Investors could hold the bonds for as long as 15 years. If the financial health of the bank dwindled to below a key 5% market level (known as core tier 1 capital ratio), the bond would convert to shares.
In December 2014, Lloyds announced that it wanted to buy back or exchange a bulk of ECNs for up to £8.4 billion.
Although, clearly someone at the Treasury was a little too eager in saying ‘yes’ to Lloyds, the decision is a difficult one.
Lloyds’ 325% surge in profits before tax and a restart to paying dividends shows that the bank’s financial health is much stronger than that from 2009.
However, the move could leave the very people who bailed out the bank, via investing in the ECNs, massively out of pocket.
Lloyds is aiming to give ECN holders just 128.5p per bond with an annual interest rate of 16.125%. This is dramatically less than the 175p they were worth before Lloyds issued its first warning.