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Co-op bondholders attack regulator's 'punitive' stance
An investor action group warns the Prudential Regulation Authority that its tough stance on the Co-op Bank could backfire.
by Michelle McGagh on Jul 10, 2013 at 12:12
An action group of Co-operative Bank bondholders has warned the bank could be forced into nationalisation - or state ownership - if the financial regulator pursues what it claims are ‘punitive and disproportionate’ requirements to strengthen its finances.
The customer-owned bank has been ordered by the Prudential Regulation Authority (PRA) to find £1.5 billion of new capital to shore up its balance sheet against losses from commercial lending and to meet new rules on financial strength.
Under the bank's plans the 15,000 holders of its permanent interest-bearing (Pibs) and preference shares will shoulder the lion’s share of the cuts, which affect both the interest they receive and the value of their bonds.
An action group of 1,300 bondholders, spearheaded by fixed income expert Mark Tabar, who successfully fought a similar battle against the Bank of Ireland, has written to PRA chief executive Andrew Bailey to warn about the consequences.
In his letter, copied into chancellor George Osborne, new Bank of England governor Mark Carney, former City minister Lord Myners and Treasury Select Committee chairman Andrew Tyrie, Tabar warned the PRA’s requirements could breach European law.
He also said the damage to bondholders would result in ‘great distress’ and could create an ‘avoidable standoff which could result in unnecessary nationalisation of the bank and massive damage to the Co-operative Group and the mutual sector’.
As part of the £1.5 billion rescue plan, the Co-op proposes to swap £1 billion of junior debt into new financial instruments, meaning investors will take the biggest hit while the Co-op Group picks up the tab for the remaining £500 million.
Tabar said the Co-op would be willing to pay more and ease the burden for bondholders if the PRA had not been so tough in forcing the bank to hold 9% of its loans and deposits as 'core capital'. This is a buffer designed to cope with unexpected losses. Tabar described the level of core capital chosen by the regulator as ‘arbitrary’, pointing out that the bank met the current legal minimum of 4.5%.
He said: ‘As a direct result of the PRA’s punitive and disproportionate actions we have moved away from a situation of the Co-op Group being prepared to do more to support its bank, bondholders being willing and expecting to contribute on a voluntary basis and the requirement of approximately £800 million suggested by the audited accounts would have been filled.
‘But the PRA’s position and inflexibility – it is treating the bank as a systemically important financial institution – has caused everyone to dig their heels in, threatens to cause a standoff and risks an outcome nobody wants. It is therefore the PRA which has to move and act as follows without further delay in order to avert a crisis.’
Tabar called for the PRA to justify its decisions and confirm whether it had a guarantee from the Co-op that proceeds from the sell-off of its insurance business would be put back into the business.
More about this:
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- What you could receive in the Co-op Bank debt swap
- Bond investors hit as Co-op agrees £1.5bn rescue plan
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- Co-op Bank stops new corporate lending to conserve capital
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by Michelle McGagh on Dec 05, 2013 at 05:01