Hohn demands Lloyds replace £10bn "cocos" The Children's Investment Fund, the activist hedge fund manager, has called on regulators to force Lloyds Banking Group to bolster the bank's capital reserves. Christopher Hohn, the fund's chief executive, has written to the UK's Financial Services Authority urging it to compel Lloyds to replace £10bn of contingent convertible debt - or cocos - with ordinary shares. Mr Hohn, whose TCI fund pushed for the sale of ABN Amro to Royal Bank of Scotland and helped derail a bid for the London Stock Exchange, would not comment on its holding in either Lloyds" equity or debt. However, one person close to the situation said TCI owned about £1bn of Lloyds cocos and a rival fund manager said it had held the position for at least the past year. It is unclear whether TCI holds any equity in the bank. The Lloyds cocos have performed poorly in the market in recent months, prompting hedge fund managers to speculate that TCI was pursuing the issue in an effort to inject investor interest back into very illiquid instruments. Bondholders who are bought out of the cocos ahead of their 2019 expiration date, and given cash or equity, would receive a windfall as the price would be likely to exceed the market value of the bonds. In a letter to Andrew Bailey, the UK's chief banking regulator, Mr Hohn criticised the effectiveness of the Lloyds cocos as they would only convert to equity if the bank's core tier one capital ratio dropped below 5 per cent - a sharp fall from the current 11 per cent. The FSA is expected to restructure a similar instrument at RBS, which has an £8bn contingent debt facility also with a 5 per cent trigger. Mr Hohn calculated that Lloyds would have to suffer a £20bn post-tax loss before the FSA could force it to swap the existing cocos for equity. He argued that the capital instruments were also unattractive for the bank as they pay an average yield of about 12 per cent. Mr Hohn said this would cost Lloyds about £1bn per year, money that could otherwise be used to support lending. However he warned that the government, which owns 40 per cent of Lloyds, would prefer to avoid restructuring the cocos into equity as this would dilute its holding. He accused it of "keeping leverage high at the expense of the right regulatory decision." TCI shot to prominence eight years ago when it opposed the planned takeover by German exchanges group Deutsche Börse of the LSE. Mr Hohn also prides himself on having "put ABN Amro into play," according to one person who knows him well. TCI was a key shareholder in ABN ahead of the takeover battle for the Dutch bank between Barclays and a consortium of RBS, Santander and Fortis, and had pressed management to break up the bank.