Supreme Court split on ECN contractual interpretation

Supreme Court split on ECN contractual interpretation

The Supreme Court’s decision in BNY Mellon Corporate Trustee Services v LBG Capital No 1 Plc that the respondent bank had been entitled to buy back bonds at face value is examined by Stephen Robins of South Square.

Original news

BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 Plc and another [2016] UKSC 29, [2016] All ER (D) 89 (Jun)

The Supreme Court dismissed the appeal of the trustee for the holders of £3.3bn of enhanced capital notes (ECNs) against a decision that the ECNs were redeemable because there had arisen a ‘capital disqualification event’, as defined in the terms and conditions of the trust deed.

What was the background to this case?

At the height of the global financial crisis in 2009, Lloyds Banking Group issued £8.3bn of ECNs which paid high rates of interest. According to their terms, the ECNs would convert into ordinary shares in Lloyds in the event of its capital adequacy position falling below a defined trigger point. Additionally, Lloyds had a contractual right to redeem the ECNs early at par on the occurrence of a ‘capital disqualification event’. Condition 19 of the terms and conditions of the ECNs provided that such an event would occur:

‘[…] if as a result of any changes to the regulatory capital requirements or any change in the interpretation or application thereof by the Financial Services Authority [FSA], the ECNs shall cease to be taken into account in whole or in part (save where this is only as a result of any applicable limitation on the amount that may be so taken into account) for the purposes of any stress test applied by the FSA in respect of the Consolidated Core Tier 1 Ratio.’

The condition also applied to the FSA’s successor, the Prudential Regulation Authority, and the Supreme Court confirmed that the reference to the Core Tier 1 Ratio included the successor concept, known as Common Equity Tier 1.

During early 2015, Lloyds announced that a capital disqualification event had occurred and that it was entitled to redeem the ECNs, in advance of the contractual maturity dates, so as to bring an end to its obligation to pay interest on them.

Since such early redemption was going to be prejudicial to the holders of the ECNs, who faced losing their continuing right to interest,

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About the author:

Emma is head of the Banking and Finance team and the Finance Group at LexisNexis®UK.

Emma has wide-ranging experience in derivatives and capital markets with a particular emphasis on credit derivatives and structured products. Emma qualified as a solicitor with Allen & Overy LLP, working in the derivatives and structured finance teams in both their London and Paris offices before gaining experience with Deutsche Bank AG (advising the foreign exchange prime brokerage desk) and Crédit Agricole CIB (advising the fixed income and derivatives desk) before joining LexisNexis®.