Jury out on appeal for Lloyds' hybrids

By Jane Merriman and Alex Chambers

LONDON (Reuters) - Lloyds (LLOY.L) looks set to get investor support for a hybrid bond exchange into 7.5 billion pounds of new enhanced capital notes (ECN) but it is not clear how much wider appeal these new securities will command.

That wider appeal could be enhanced not just by the outlook of current investors in Lloyds' Tier 1 and upper Tier 2 bonds -- and the performance of the transaction -- but whether there will be continued regulatory approval for existing hybrids.

The bonds convert into equity under certain circumstances, hence their alternative name of contingent convertibles/capital.

"I guess there are enough carrots and sticks to make sure this should be a successful transaction," said Oliver Judd, financials analyst at Aviva.

He said the Lloyds' exchange offered investors more in terms of coupon and certainty in terms of maturity.

"It's a new instrument and it remains to be seen if this is indeed the future," Judd said.

Last week the bank, part-owned by the government, unveiled a 21 billion pound capital raising to free itself from a state insurance scheme for bad debts.

This included the exchange of certain hybrid bonds into these contingent convertible securities, which automatically convert into ordinary shares if Lloyds' core Tier 1 capital ratio falls to less than 5 percent.