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It had been a while since The Children’s Investment Fund popped up on the radar in Europe. The activist hedge fund run by Christopher Hohn has focused its recent campaigns on Asia, opposing Coal India’s pricing policies in the spring before turning to Japan Tobacco and a drive for bigger dividend payouts.
This week, TCI made the news at home in the UK after Mr Hohn publicised a letter in which he urged the Financial Services Authority to force Lloyds Banking Group to beef up its capital.
Although Mr Hohn was coy about admitting it, it turned out TCI has a significant position in Lloyds’ high-yielding contingent capital bonds, so-called cocos. Mr Hohn believes Lloyds should ditch the instruments in which he has invested and replace them with equity.
Cocos are designed to turn from debt into equity if Lloyds’ core tier one capital ratio – the key measure of capital strength – falls below 5 per cent. The snag is new global capital rules make that trigger point too low. A 7 per cent trigger will be needed in future.
TCI hopes Lloyds will be forced to buy in the outmoded cocos at prices higher than their current trading value. But the City regulator appears to sympathise with Lloyds’ position that there is no rush to comply with capital rules that are being phased in by 2019. Lloyds will almost certainly replace the cocos with debt with a higher conversion trigger at some point but Mr Hohn might have a wait on his hands.