Lloyds flushed with success as investors buy £7bn of CoCos

Lloyds today claimed strong support as it persuaded investors to swap £7 billion of bonds for new ones known as contingent convertible capital notes, or CoCos, which automatically switch into equity if the bank's capital position weakens to less than 5% of the money out on loan.

With another £1.5 billion of debt converted into more equity-like instruments analysts said the oversubscription bodes well for tonight's pricing of Lloyds record-breaking £13.5 billion rights issue.

Market traders said the rights issue could be priced as high as 35p after Lloyds existing shares rose 2.1p to 90.3p. This month Lloyds said the new shares would be sold at a big discount but not under 15p.

The rights issue is designed to allow Lloyds not to take up the Government's asset protection scheme and so keep the taxpayer's stake at 43% rather than taking a majority stake. Demand for CoCos outstripped the amount Lloyds was offering by more than £4billion, suggesting they could become increasingly important in financing banks.

But analysts cautioned against reading too much into the demand. "The CoCos were a bit of a no brainer," said one analyst. "The shares will be another matter."

Gary Jenkins, head of fixed-income research at Evolution Securities, said Monday that the success of the Lloyds' exchange doesn't necessarily mean CoCos will become "the next big thing. The real test would be if bond investors were prepared to invest in CoCos that were being issued as a new instrument in exchange for cash, rather than for existing impaired bonds," he said.