06/26/2009

Lloyds to Clear Out Massive Bond Inventory

Lloyds Banking is unwinding one of the world's largest portfolios of asset- and mortgage-backed bonds.

The holdings, with an estimated face value of $105 billion, represent the combined businesses of a buyside platform that the London bank inherited with its January takeover of HBOS and a smaller program it was already maintaining.

The HBOS component, accounting for $80 billion of the total, had been run by Richard Paddle in London. He left the bank last month, and is expected to take a few months off before getting back into the business. Also gone are six members of Paddle's 10-person team, including portfolio managers Jason Walker, Milan Patel and Asha Panigrahi.

Paddle was overseeing the portfolio as HBOS' head of credit-product trading. His duties have been taken over by Lloyds' Kate Grant - who was already running more than $25 billion of structured-product investments at the bank.

The remaining members of Paddle's group, including portfolio manager Wouter Vanasscher, have been folded into Grant's team.

While Lloyds appears to be focusing on HBOS' securitized-product investments for disposal, word is that the bank eventually intends to unload the holdings of Grant's division as well. In both cases, the moves would come as part of an effort by the battered bank to shed risk after receiving substantial cash infusions and other support from the U.K. government.

Some of the holdings would be allowed to mature, while others would be sold. But inconducive market conditions could cause the process to take five years or more.

At its peak, Paddle's team at HBOS handled even more assets and numbered 22 staffers. By mid-2008, layoffs, resignations and transfers had eliminated all but 10 of the individuals - as HBOS, like other banks, saw the values of its structured-product holdings plunge amid the global financial crisis.

Paddle funded many of his group's investments through Grampian Funding, an HBOS-run commercial-paper conduit that used to be the largest of its kind. That securities-arbitrage vehicle held almost $40 billion of securities two years ago and had almost $30 billion of investments of April 30.

But the volume of Grampian paper in the hands of outside investors, which used to match its underlying holdings, have fallen to a mere $5 billion as weak demand has forced HBOS to supply most of the vehicle's funding on its own. Grampian's portfolio includes large amounts of asset-backed securities, mortgage bonds and collateralized debt obligations issued in the U.S.

Grant also used a Lloyds conduit called Cancara Asset Securitisation to fund investments in asset-backed bonds and CDOs. The vehicle has taken part in direct purchases of auto loans, trade receivables and other assets as well. It has roughly $16 billion of paper outstanding, down from about $25 billion in 2007.

Lloyds Banking was known as Lloyds TSB prior to its takeover of HBOS. Together, the institutions have taken $6.9 billion of writedowns on debt-product holdings since mid-2007.

Back Print