Reuters: Bankruptcy News: Lloyds seeks spread boost with senior buy-back

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Lloyds seeks spread boost with senior buy-back Jun 29th 2012, 13:54 By Helene Durand Fri Jun 29, 2012 9:54am EDT LONDON, June 29 (IFR) - Lloyds TSB Bank launched a large scale senior debt buy-back this week as it seeks to improve its funding costs and make the most of accumulated excess liquidity. The announcement came just ahead of the Bank of England statement on Friday which said UK banks could run down their liquidity buffers as a way of helping the economy. . The UK bank is targeting GBP13.7bn equivalent of senior bonds with maturities between 2014 and 2021 and coupons between 4.375% and 6.75%. Lloyds has put a GBP1.25bn cap on the euro/sterling offer while the dollar part, which is an any and all offer, targets USD11.25bn worth of debt. The move appears at odds with many European banks that have struggled with liquidity in recent months and have instead become more and more reliant on central bank funding. While Lloyds did tap the ECB's three-year cheap funding line in February for GBP11.4bn, the aim was to fund a pool of non-core euro denominated assets. "Lloyds has a strong liquidity position that significantly exceeds its short-term funding and is considerably in excess of current regulatory requirements," the bank said in a statement. "By tendering for certain euro, sterling and US dollar senior unsecured securities, the group intends to manage its overall wholesale funding level and better optimise its future interest expense, while maintaining a prudent approach on liquidity." According to a note published by CreditSights, Lloyds' liquid assets increased by GBP20bn to GBP223bn in the first quarter of 2012, of which primary liquid assets were GBP106bn, against short-term funding of GBP91bn. According to a Lloyds spokesperson, the current requirement for liquid assets is GBP70bn. POSITIVE SIGNAL "Lloyds' spreads have not performed well, particularly in the US," said a banker close to the deal. "The regulatory backdrop and the fact that the UK has had a resolution regime for a while has been hanging around UK banks' necks and with this buy-back, Lloyds is seeking to address that." The banker added that versus other European banks of similar quality, the spread differential could be as big as 75bp and that this difference was particularly accentuated in the dollar market. "This trade should help improve the bank's net interest margin and it should see the benefit over the medium to longer term," he said. Investors agreed that the exercise sent a positive signal to the market. "Generally, it's a positive statement," said one analyst at a fund manager. "It shows Lloyds feels comfortable with its funding position and implies it doesn't need to do that much wholesale funding." Another agreed. "You have to be pretty confident with your liquidity position to buy-back senior," the investor said. "Lloyds trades wider than perhaps it should and it's been like this for a couple of years. This exercise should help them in terms of spread performance." The market certainly responded positively, and the immediate reaction was a 50bp to 70bp tightening in the dollar tranches while the euro and sterling bonds moving in by 40bp. Interestingly, the signal could be so strong that investors decide not to sell their bonds back. "If you like Lloyds' senior, you probably want to hold it even more now," said one of the investors while bankers on the deal said the lack of general financials supply could mean that investors decide to hold on to their bonds. Market participants agreed that the premium versus secondaries looked fair. The bank is offering between 25bp and 55bp over where the bonds had been trading. The prices on the euro and sterling buy-back will be determined through a Modified Dutch Auction with the maximum spread offer ranging between mid-swaps plus 90bp and 200bp on the euro and Gilts plus 315bp on the sterling. Spreads on the dollar tranche range between Treasuries plus 260bp and 305bp. JURY STILL OUT Some bankers away from the deal did wonder however whether the initial reaction would last overtime. "I might be a bit of a cynic, but this seems like a very good PR exercise to me," said a banker away from the deal. "For a bank of Lloyds' size, buying back GBP1-2bn barely scratches the surface. I think this is more about sending a message to the market." Another said that it remained to be seen whether investors concerns had been around the size of Lloyds' funding programme or whether its wider spreads were more to do with wider macro issues and Lloyds' exposure to some of Europe's weaker sovereigns. One of the investor agreed and said that while the liability management should help spread performance at the margin, there were many other things at play. Deutsche Bank and Lloyds are dealers managers on the trade. The offer expires on July 6 and the result will be announced on July 11. Link this Share this Digg this Email Reprints

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