Lloyds TSB Bank enters U.S. public market with two step-up deals

By Emma Trincal

New York, July 7 - Lloyds TSB Bank plc is making its first foray in the United States as a structured note issuer with two upcoming public offerings, a market participant said commenting on two 424B5 filings with the Securities and Exchange Commission.

Lloyds TSB Bank plans to price two separate issues of callable step-up fixed-rate notes. One is a seven-year product being sold by UBS Securities LLC, the other, a 15-year note to be distributed by Barclays Capital Inc.

"These are their first SEC-registered deals in structured products. They've done deals before, but they were 144A," the market participant said.

"They've done only a few private deals. One was in May. It was a lightly structured note, fixed-to-floater capped."

Two step-ups

"I'm not surprised this is happening. Fixed-income offerings are very popular," said a structurer.

Lloyds TSB Bank plans to price callable step-up fixed-rate notes due July 27, 2018 via UBS.

The coupon is 3.5% for the first three years. It will step up to 4% on July 27, 2014 and to 5.5% on July 27, 2014. Interest is payable semiannually.

The payout at maturity will be par.

The notes will be callable at par on any interest payment date beginning on July 27, 2014.

Separately, Lloyds TSB Bank plans to price callable step-up fixed-rate notes due July 28, 2026 with Barclays as the agent.

The coupon is 5% for the first seven years. After that, it will step up to 5.5% on July 28, 2018, to 7.25% on July 28, 2021 and to 10% on July 28, 2024. Interest is payable semiannually.

The payout at maturity will be par.

The notes will be callable at par on any interest payment date beginning July 28, 2018.

Private deals

"Yes, I've heard a bit about their new entry into the USA. They're looking to raise capital in the U.S. by lending out their balance sheet," an industry source said.

"I've seen them before. I've seen small deals, step-up type, no equity," a source said.

"They don't come to market very often," a fixed-income trader said.

That could change, according to the market participant, as the U.K.-based bank is partnering with two big agents to sell the notes.

"They've done a few private structured notes, but they look to do more by doing their first registered product, and their goal is to diversify their funding not just in the U.K. but in the U.S. as well," he said.

"They have attractive funding rates, which may attract investors in search for yield."

Lloyds Banking Group plc, the guarantor for both issues, is rated Aa3 by Moody's and A+ by Standard & Poor's. It is the largest retail bank in the United Kingdom, according to the bank's website.

Credit diversification

"Lloyds may be trying to become a third-party issuer, like SEK, for instance," the structurer said.

SEK stands for AB Svensk Exportkredit or Swedish Export Credit, a state-owned Swedish credit institution and a frequent issuer of U.S. structured notes.

Third-party issuers do not sell their deals as investment banks do.

"They're not going to set up a sales desk. They're the issuer. They're in the business of getting funding. They're going to work with agents like Barclays and UBS. That's what they're doing. In fact, they're probably doing this because the agents are bringing the business," the structurer said.

Structured notes expose investors to credit risk and require at some point that the investor diversify away from the same credits in order to reduce the risk, the structurer explained.

"This is the result of investors' need to obtain credit diversification," he said.

"Sellsiders at Barclays and UBS may show investors some notes issued by their respective banks. And many times investors or advisers may say, look, if you want to sell this type of paper, you need to bring a new issuer. They like the structure, but they need credit diversification, especially on the institutional side."

This structurer said that although the bank is not based in the United States, it should have no name recognition problem.

"Lloyds as a name could be attractive. It has good ratings. It's a bank based in the U.K. We're not talking about an unfamiliar country. It's the U.K. Barclays is a U.K. bank. And Lloyds is a familiar name.

"When you buy a structured note, do you need Lloyds to be at the street corner, like Citibank? No.

"They have a shelf registered in place. So now they can issue a deal.

"The biggest hurdle for a foreign bank seeking to issue structured notes in the U.S. is to get a registered shelf. A lot of foreign banks would like to have a shelf, but it's not easy because the SEC has a lot of requirements. But once you have the shelf, you can do some business here."

The UBS notes will price on July 22 and settle on July 27. The Cusip number is 5394E8AA7.

The notes to be priced by Barclays will settle on July 28. The Cusip is 5394E8AB5.

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