The £500m equivalent lower tier two bond rallied 10bp-15bp in secondary trading as investors scrambled to make up for disappointing allocations.
Citigroup and Royal Bank of Scotland were bookrunners.
The Royal Bank of Scotland and its predecessors have covered Lloyd's as a client for at least 200 years, and the bank was pleased to have been awarded a mandate at last.
The lower tier two capital issue came in two tranches, rated BBB+/BBB+.
A £300m 21 year non-call 11 tranche was priced at 207bp over Gilts, and had tightened to 192bp over by last (Thursday) night.
Alongside that was a Eu300m 20 year non-call 10 euro tranche, priced at 172bp over mid-swaps, which was last night trading at around 173bp over Bunds.
Each tranche's call date is hardened by a 100bp coupon step-up.
As an insurance market formed of autonomous underwriting syndicates, Lloyd's is a unique institution. It also has a turbulent recent past.
For most of its history, the policies written at Lloyd's have been backed by ?names' ? wealthy individuals who, in return for an annual stipend and an element of social cachet, pledged limitless liability to cover losses.
Heavy claims due to asbestos litigation in the US in the 1990s led to widespread personal bankruptcies among the names, recrimination and litigation. Lloyd's was forced to restructure, and has revised its risk management procedures.
But many investors remembered the crisis of the early to mid-1990s and, aware of the uniqueness of the credit, took a long time to come to terms with it.
?This is the story of the gradual conversion of a sceptical audience,? said Alan Patterson, head of the financial institutions group in debt capital markets (FIG DCM) at Citigroup.
?Lloyd's is unlike any other credit that investors have looked at before, so investors had to do a lot of work,? he said. ?As they looked at it, they became more comfortable. Investors got to grips with the huge amount of change that has gone on in Lloyd's and especially the change in risk management.?
Since 1992, the portion of Lloyd's capital made up of individual names with unlimited liability has fallen from just under £9bn to less than £2bn. Total capital has grown to over £14bn.
Private names now provide just under 19%.
Divergent views
Bookbuilding started slowly. Late last week, the market was bandying around wildly divergent views of what pricing should be ? from 180bp over Gilts to more than 300bp over.
That range shows how difficult investors found it to assess the credit.
?Some of the investors said this was one of the strongest roadshows they had seen,? said Gordon Taylor, head of UK financial institutions origination at Royal Bank of Scotland. ?The management had to convince investors to trust it, and its risk management and control systems. Investors were asked to have confidence in the new management regime, and they did.?
The bookrunners initially set price guidance on Monday at 220bp over Gilts for the sterling tranche and 185bp over mid-swaps for the euro tranche.
That price talk was tightened by 10bp for each tranche on Tuesday. Then, before the pricing on Wednesday, the spreads were tightened by a further 3bp in each currency, leaving final spreads of 207bp over Gilts and 172bp over mid-swaps.
Yesterday (Thursday), the sterling had rallied to 192bp/187bp over Gilts, while the euro note had come in to 173bp/169bp over Bunds, 10bp tighter than where it had been priced.
One fund manager at a major European fixed income asset manager said that, although he was sorry to be missing out on the rally in the bonds since pricing, he remained uncomfortable about the lack of transparency of the risks of the syndicates, which are subordinate to this week's issue.
?An investor has no way of knowing,? he said. ?How do you get visibility on the risks, the real risks they are writing? If there is an event ? a terrorist attack or a hurricane ? you have no way of knowing what the exposure is. You are being asked to place enormous trust in the central management.
?We didn't take part and we understand that there were a lot of people like us.?
Comparable bonds investors looked at included outstanding insurance hybrid capital deals in sterling from Munich Re and Zurich Finance.
Zurich Finance's perpetual non-call 2022 deal has tightened from 185bp over Gilts when it was first launched in September 2003 to 153bp over yesterday.
The Munich Re 2028 non-call 2018 deal has tightened from 295bp over when launched to just 148bp over, according to Reuters.
Lines of defence
Lloyd's first line of defence is the members' premium trust funds. These funds are available for meeting claims and other expenses.
The premium trust funds also fund overseas regulatory deposits.
If these funds were to run out after heavy losses, Lloyd's policyholders would have recourse to members' additional capital, held centrally at Lloyd's.
The central fund is available at the discretion of the Council of Lloyd's, which may first offer up the assets of those members with unlimited liability.
The central fund has about £800m of assets, and will also be supported by a loan from syndicates, equal to 0.75% of each syndicate's capacity in that year. Syndicates make the loan each year, but for only three years at a time, so in the fourth year, get back what they put in in the first year.
Proceeds from the bond issue will go into the central fund, but the syndicates' loan will rank junior to it.
