30 SECOND GUIDE TO ...

ENHANCED CAPITAL NOTES

Sound interesting?

DO they? Interesting or not, ECNs are pretty important. They are also known as CoCos.

CoCos?

Short for Contingent Convertibles. They are a relatively new form of fixed income security, born out of the need for banks to increase the capital they hold after the global banking crisis.

Examples?

Lloyds Banking Group was the first UK issuer of ECNs. They work like normal fixed income securities such as bonds in that they pay a coupon to the buyer. The difference is that they automatically convert into shares if the bank’s capital ratio – a measure of its ability to withstand financial shocks – falls below 5pc.

What’s new?

Lloyds has bought back £58.5m of ECNs from buyers. It believes changes in European rules mean they will no longer qualify as capital against future losses. So they want to pay off these investors and raise money another way.

Fair?

Some say not. Investors were forced to swap normal bonds for these ECNs during the financial crisis, helping the bank to avoid another bailout. Now Lloyds has painted investors into a corner, saying they must sell up now or risk being forced to sell at a lower price further down the line. Apparently that was in the small print all along, so investors have no choice.