Early redemption of convertible securities

Early redemption of convertible securities

How did the court approach the question of whether a capital disqualification event had occurred so as to allow the early redemption of convertible securities? Laura Davis, associate at DAC Beachcroft, says the court’s focus in BNY Mellon v LBG Capital was on bringing commercial sense to the contract.

Original news

BNY Mellon Corporate Ltd v LBG Capital No. 1 plc and another [2015] EWCA Civ 1257, [2015] All ER (D) 112 (Dec)

The Court of Appeal, Civil Division, in allowing the defendant issuers’ appeal, granted a declaration that a ‘Capital Disqualification Event’ (CDE) had occurred, thereby entitling the issuers to redeem enhanced capital notes in accordance with their terms.

Briefly, what was the background to the appeal?

This case relates to £3.3bn of enhanced capital notes (ECNs) issued by Lloyds Bank subsidiaries (LBG) in 2009. The ECNs were designed to increase Lloyds’ core tier 1 capital (CT1 Capital) after the Financial Services Authority (FSA) found that it had a shortfall.

The ECNs would convert to CT1 Capital only if the bank’s capital position deteriorated below requisite levels. They had maturity dates from 2019–2032 and a very high interest rate. The trust deed constituting them allowed for early redemption on a CDE. The definition of a CDE (the CDE definition) included a situation where the ECNs ceased to be ‘taken into account’ for the purposes of a stress test.

In carrying out a stress test in December 2014 (the December stress test), the Prudential Regulation Authority did not take the ECNs into account. LBG announced that a CDE had occurred and it intended to redeem them. BNY Mellon, the trustee of the ECNs, issued proceedings to prevent an early redemption.

In June 2015 the High Court found that no CDE had occurred. LBG appealed.

What were the legal issues that the judge had to decide in this appeal?

The primary

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About the author:

Meet Emma:

1.  Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.  Likes ballet, playing the harp and holidays

3.  Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.