A consent solicitation has been launched to convert from hard bullet to soft bullet all but one of the covered bonds issued off a Bank of Scotland (HBOS) programme, which was the first structured covered bond programme when it was launched in July 2003.

The programme paved the way for an expansion of the asset class into new jurisdictions with its use of contractual techniques, in part inspired by securitisation, including a mechanism to create a hard bullet maturity that would at the same time allow triple-A ratings to be achieved.

With the introduction of the UK Regulated Covered Bond regime, the programme has since become a legislative one, while the issuer has become part of the Lloyds Banking Group, which today uses a Lloyds programme for covered bond funding.

The programme is now the latest of an increasing number where issuers are converting outstandings from hard to soft bullets or moving to soft bullets for new issuance. Covered bonds issued off Lloyds’ main programme are all soft bullets, while all other UK covered bond issuers have issued soft bullets.

“Given the inefficiencies of hard bullet covered bonds, more recently established covered bond programmes have included the option for a ‘soft bullet’ maturity structure,” reads the notice of bondholder meetings.

Consent is being sought for the conversion of six euro-denominated issues with maturities from 2016 to 2022 totalling Eu8.25bn (£5.85bn) and a Dkr4.68bn (Eu627m, £445m) 2018 issue.

In the event of conversion the bonds will have 12 month extension periods with coupons referenced to one month Euribor or Cibor. The rating agencies have confirmed that conversions would not affect the covered bonds’ triple-A ratings.

Bondholders who give their consent by an early indication deadline of 4pm London time on 21 July will receive a five cent early participation fee. The first bondholder meeting is on 29 July, where a two-thirds quorum is necessary with 75% of those present or 50% of the respective bond’s notional in favour required for the extraordinary resolutions to pass, otherwise a second meeting will be convened with a one-third quorum required.

Only one HBOS covered bond is not included, a $2,193.934m (Eu1,994m, £1,414m) 2017 deal. This was a 144A issue and it is understood that the deal has been left out due to the complexities this would add to the process.

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