Britain's Lloyds to repay AT1 debt as market recovers from Credit Suisse shock

By Chiara Elisei and Iain Withers

LONDON (Reuters) - Lloyds, Britain's biggest domestic bank, said on Friday it will repay an 'Additional Tier 1' (AT1) bond in June, the latest sign of a market recovery after a Swiss decision to write down such debt as part of the rescue takeover of Credit Suisse.

Lloyds is among the first major banks to say they will repay AT1 bonds since investor confidence in the market was rocked by Swiss regulators' decision to wipe out $17 billion of Credit Suisse's AT1 debt under the UBS deal.

Investors had feared that banks would decide not to repay the bonds at the earliest opportunity as a lack of liquidity and soaring yields would make it hard for them to sell new bonds.

But there are signs that sentiment is recovering, with Lloyds saying it will redeem 135 million pounds ($169 million) outstanding from its original 1.5 billion pound fixed-rate notes at the first opportunity, which is on June 27.

The bank's move follows Italy's UniCredit which said on Thursday it would redeem a 1.25 billion euro AT1 bond.

"UniCredit and Lloyds news that they will repay the AT1 bonds is definitely a positive, showing that the damage to the AT1 market can remain limited," said Joost Beaumont, head of bank research at ABN AMRO.

Last week Japan's Sumitomo Mitsui Financial Group (SMFG) sold a $1 billion equivalent AT1 bond, the first major global bank to sell such bonds since the Swiss ruling in March.

"However, until we see a new AT1 bond issued in currencies like U.S. dollars or euros, the market will not be fully tested," Beaumont added.

Morgan Stanley analysts estimated in a note last week that European banks would need to issue more than 400 billion euros of debt over the next three years.

AT1 bonds were introduced in the wake of the global financial crisis to provide lenders with tools that could allow them to pass on losses to investors, shielding taxpayers.

European regulators stressed last month that they would continue to impose losses on shareholders before bondholders, in a bid to soothe investor angst.

While yields on AT1 bonds have dropped from their March highs, they remain at relatively high levels.

($1 = 0.7981 pounds)

(Reporting by Chiara Elisei and Iain Withers; Editing by Dhara Ranasinghe and Alexander Smith)