The question of whether or not Lloyds Banking Group will resume coupon and dividend payments on its discretionary preference shares and hybrids when the EC suspension ends on 31 January 2012 has been hotly debated by investors for some time now. Lloyds have been non-committal on the subject until now with the official line being: We have also made a commitment to recommence progressive dividend payments after the EU restriction expires, as soon as the financial position of the Group and market conditions permit, and after regulatory capital requirements are defined and prudently met. However, this week the bank released its Interim Management Statement which included the following statement:
Since 31 January 2010, the Group has been prohibited under the terms of an agreement with the European Commission from paying discretionary coupons and dividends on hybrid capital securities issued by the Company and certain of its subsidiaries. This prohibition ends on 31 January 2012. The Group intends to be in a position to recommence payment of coupons and dividends on these hybrid capital securities after this date. Future coupons and dividends on these hybrid capital securities will, however, be paid subject to, and in accordance with, the terms of those securities.
This new statement certainly seems to have provided some much need clarity and I read it that, barring a significant worsening in conditions (something I would not discount in view of the crises in Europe), Lloyds intends to start paying discretionary coupons as soon as the EC suspension commitment ends on 31 January. The market seems to have taken it positively with both the main issues of preference shares (the 9.25% LLPC and the 9.75% LLPD) rising over 12% on the morning of the announcement. In general terms certainty of coupon payment seems to be the driving factor in market pricing of fixed income at present with the disconnect between paying and not-paying issues widening over recent months. And now we are seeing a narrowing as confidence of payment increases. Lloyds Enhanced Capital Notes, which are mandatory and not affected by the coupon suspension, have not moved in response which could give rise to some decent relative value switch opportunities. It seems that the market reaction is due to the increased visibility of coupon resumptions and not the overall results suggesting a reduction in risk. Hence discretionary issues have positively but mandatory issues have not moved. have taken advantage of the rise in LLPC and LLPD and sold my holdings in both with a view to switching into ECNs. Another indicator of current market drivers is the Bank of Ireland former Bristol & West PIBS (BOI). I was absolutely amazed last Friday afternoon when the price shot up over 20% after I posted and distributed the confirmation that the coupon was being paid following confirmation I received from the registrars. Below is a copy of the chart for 4 November which I have saved for posterity !  |
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A Heads Up from Lloyds for its Preference Shareholdersposted 10 Nov 2011 02:42 by Mark Taber [ updated 11 Nov 2011 00:59 ] |