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Rating Action:

Moody's concludes rating action on Lloyds hybrid and junior subordinated debt

23 Nov 2009

London, 23 November 2009 -- Moody's has today taken rating actions on certain hybrid and junior subordinated capital instruments of Lloyds Banking Group ("Lloyds"). The actions incorporate the European Commission ("EC") requirement for Lloyds to skip coupons from 31 January 2010 to 30 January 2012 on those hybrid instruments where the terms allow for such a coupon skip. This requirement was part of Lloyds' restructuring plan formally approved by the EC on 18 November 2009. The changes to some of the ratings also incorporate Moody's revised methodology for hybrids and subordinated debt (see "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt" published 17 November 2009).

Elisabeth Rudman, lead analyst for Lloyds at Moody's, explained that "the instruments are rated between Ba1 and B3 and the rating actions range from an upgrade of three notches to a downgrade of one notch, depending on the issuing entity, the type of instrument, and whether the security will defer/omit coupon payments or not. Our understanding of whether the securities will miss coupon payments is in line with the list published by Lloyds Banking Group on 3 November 2009".

The securities that will skip coupon payments ("May Pay" securities) will continue to be rated on an expected loss basis, which factors in the anticipated period of coupon non-payments and the loss severity.

The securities that are not expected to skip coupons ("Must Pay" securities) are notched down from the Baseline Credit Assessment ("BCA"), in line with Moody's revised methodology for hybrids. The BCA for Lloyds TSB Bank plc is Baa2 and the adjusted BCA (incorporating parental support) for Bank of Scotland plc is also Baa2. The holding company ratings are one notch lower due to structural subordination.

The rating actions are summarised as follows, with a full list of ISINs in an attached document. All ratings have a negative outlook.

http://v3.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_121363

Non-cumulative preference shares/ preferred securities May Pay -- affirmed at B3, outlook changed to negative -- List A:

The B3-rated non-cumulative preference shares/ preferred securities which will skip two years of coupons over the two- year period (May Pay) in line with Moody's previous expectations, are rated on an expected loss basis and are affirmed at B3, but the outlook has changed from stable to negative. The negative outlook highlights the fact that downward pressure on the BFSR (which already has a negative outlook) would lead to a lower rating.

The two non-cumulative preferred securities issued by Lloyds TSB Capital 1 and 2 LP, that will only omit one annual coupon, due to their dividend pusher language related to other preference shares, have been upgraded to B1 (negative outlook), to reflect the lower loss for investors.

See List A in the attached document for further details.

Non-cumulative preference shares/ preferred securities Must Pay -- upgraded from B3 to Ba2/Ba3 (negative outlook) -- List B:

The B3-rated non-cumulative preference shares/ preferred securities which do not have optional coupon skip but have mandatory coupon skip tied to the breach of distributable profit triggers, are not expected to omit coupons over the two-year period (Must Pay). Therefore, those ratings have been upgraded to Ba2 (negative outlook) for securities issued by Lloyds TSB Bank plc and Bank of Scotland plc, and Ba3 (negative outlook) for securities issued by Lloyds Banking Group and HBOS plc. The instruments are rated three notches below the adjusted BCA of Lloyds TSB Bank plc, and Bank of Scotland plc, incorporating an additional notch for structural subordination. See List B in the attached document for further details.

Cumulative preferred securities May Pay -- confirmed at Ba2 (negative outlook) -- List C:

The cumulative preferred securities of Lloyds TSB Bank plc which are may pay securities were rated Ba2 (under review for possible downgrade) and have been confirmed at Ba2 (negative outlook) on an expected loss basis. See List C in the attached document for further details.

Cumulative preferred securities Must Pay -- upgraded to Ba1 (negative outlook) -- List D:

The cumulative preferred securities of Lloyds TSB Bank plc and Bank of Scotland plc which are must pay securities were upgraded from Ba2 (under review for possible downgrade) to Ba1 (negative outlook). The instruments are rated two notches below the adjusted BCA of Lloyds TSB Bank plc and the Bank of Scotland plc instruments.

See List D in the attached document for further details.

Junior subordinated debt May Pay -- downgraded to Ba2 (negative outlook) -- List E:

The May Pay junior subordinated debt has been downgraded from Ba1 (under review for possible downgrade) to Ba2 (negative outlook) on an expected loss basis.

See List E in the attached document for further details.

Junior subordinated debt Must Pay -- confirmed at Ba1 / downgraded to Ba2 (negative outlook) -- List F:

The Must Pay junior subordinated debt of Lloyds TSB Bank plc and Bank of Scotland plc was confirmed at Ba1 (negative outlook). The instruments are rated two notches below the adjusted BCA of Lloyds TSB Bank plc and Bank of Scotland plc instruments.

The Must Pay junior subordinated debt of HBOS plc was downgraded to Ba2 (negative outlook), which incorporates an additional notch for structural subordination.

See List F in the attached document for further details.

Correction of Lloyds Banking Group dated subordinated debt security (ISIN XS0145620281):

Moody's has also corrected the rating of the Lloyds Banking Group dated subordinated debt security (ISIN XS0145620281) from Ba1 to Baa3 (negative outlook). The instrument was rated Ba1, in line with other Lloyds Banking Group dated subordinated debt securities. However, as the instrument benefits from a guarantee from Lloyds TSB Bank plc, it should have been rated Baa3 (negative outlook), in line with other Lloyds TSB Bank plc dated subordinated debt securities.

PREVIOUS RATING ACTIONS AND METHODOLOGIES USED

The last rating action on Lloyds Banking Group was on 3 November 2009 when the Aa3 senior debt rating of Lloyds TSB was affirmed and the BFSR was downgraded to C-. The last rating action taken on the hybrid securities of Lloyds Banking Group was on 9 September 2009, when various instruments were downgraded to reflect the increased probability of the EC requiring Lloyds to skip coupons on those instruments.

The principal methodologies used in rating the entities are "Bank Financial Strength Ratings: Global Methodology" and "Moody's Guidelines for Rating Bank Hybrid Securities and Subordinated Debt", which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

London
Elisabeth Rudman
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
Johannes Wassenberg
Managing Director
Financial Institutions Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's concludes rating action on Lloyds hybrid and junior subordinated debt
No Related Data.
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