By Matt Scuffham
LONDON (Reuters) - Lloyds Banking Group (L:LLOY) will not be allowed to buy back bonds early from thousands of retail investors to save on expensive coupon payments worth 200 million pounds each year, a court ruled on Wednesday.
The enhanced capital note (ECN) bonds were issued by Lloyds in 2009, shortly after its 20.5 billion pound government rescue, and were designed to provide an extra layer of capital should it run into trouble.
The bonds paid high annual interest of between 6 and 16 percent and as such, were popular among retail investors seeking secure, higher yielding investments. Hedge funds and asset managers were also big holders of the bonds.
Lloyds, in which the government still holds a 19 percent stake, had wanted to buy back the notes, which were due to mature at dates between 2019 and 2029, at face value.
The move would have saved it 200 million pounds for the next 5 years, benefiting the bank to the tune of 1 billion pounds ($1.5 billion).
The bank had argued that new British and European capital rules meant the ECNs would no longer count as core capital to cushion the bank if it ran into financial problems.
However, a judge in Britain's high court rejected that argument, saying that, although the ECNs were not taken into account in the most recent stress test undertaken by Britain's financial regulator, they may still be taken into account in future stress tests.
The bank said it was disappointed with the decision and had sought permission to appeal.
Lloyds said it remained confident its net interest margin would still exceed its 2.55 percent target in 2015 and continued to expect its return on equity to be between 13.5 percent and 15 percent by the end of 2017.
Lloyds issued around 8.3 billion pounds of enhanced capital notes in 2009 and exchanged about 5 billion pounds worth of them last year for new instruments. That left around 3.3 billion of the notes outstanding.
The price of the bonds rose on Wednesday, as the market reacted positively to the decision which will mean investors carry on receiving high coupon payments that they wouldn't have been entitled to if the verdict had gone in Lloyds' favour.
Shares in Lloyds were down 0.1 percent at 1034 GMT, compared with a 0.9 percent rise in the European banking index (SX7P).
($1 = 0.6546 pounds)