Lloyds' ECN
Lloyds
** Lloyds: There was certainly a kerfuffle as you know on the ECNs yesterday. That said, I think if you read back through the transcript of the call it’s not as brutal as some of the more fundamentalist branches of the trading community might suggest. Yes the folks on the mentioned reg par call, but they did so within the context of everything we already know – i.e. that you’d have to be “blind and deaf not to know that there was a reg par call option on these instruments”. Well yes we know about that, we’ve talked little else on these damned things for two years.
It’s clear that Lloyds does not know yet whether or not the PRA will allow the ECNs as stress test capital but again, as we already know, it’s only a matter of time until they do not. They said on the equity call that “yes, they do count… they count within our stress-tests that we currently carry out for the PRA. In terms of go forward, so the go forward is much less certain”. Again this lack of certainty is something we already knew. They do not expect the PRA to rule on what can or cannot be included in buffer capital until at least the back end of H1 and then management will take a decision after that. And in that context, the Treasurer also said that while “I wouldn't call myself investor-friendly, but I would call myself fair. And I don't see myself deviating from that adjective any time soon” and that, “again, we seek to be fair and that's a model that's worked for us through the crisis. And we want to make sure that we treat our investors fairly, that we have a good relationship with them and that is important to us.“ and that, “I've got to balance that against maintaining market access and ensuring that we maintain Lloyds as a name in the hearts and minds of our investor community”. That doesn’t sound like someone who will willingly and wilfully exercise a reg par call unless the market does the job for him.
Obviously the consequence has been to make any future action as cheap as possible. They noted on the call that any cost associated with taking out some of the ECNs (and not all of them by any means) would be little more than a rounding error, and this was in the context of mentioning a premium – yes, even though they did mention the well-known concept of reg par call, the Treasury chap also said “the premium will depend ultimately on how we choose to do it, if we choose to do anything at all.” So is this just a cynical ploy to make it a bit cheaper to exercise a tender or exchange into AT1 (something that they mentioned in the annual report that they will look to do this year)?
You can’t help but feel that the general downside pressure is going to continue as what investors (and to an extent Lloyds) is doing is creating a self-fulfilling prophesy, but I doubt it's going to be a bone-crusher. At the end of the day, I don’t think that if you have the mid-level coupons (in the 6-8% range) that prices are going to deviate much from the 106-109 kind of price that we saw yesterday. The coupon accrual and decent running yield for the next 4-6 months until any decision is guided, plus a modest premium, should offset too much of a pull back to par.
It’s easy to be sanguine after the event, I appreciate that, but I do think that we need to caution about throwing the baby out with the bathwater, the tone of the call was very different from the near-panic that ensued, but like I say there is the threat of a self-fulfilling prophesy as we know.