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'Tragic' day for Co-op as bondholders seize control

Bond holders win better terms in a new bailout for the Co-operative Bank. Co-op Group sees its stake in bank fall to 30% in blow to mutuality.

 
'Tragic' day for Co-op as bondholders seize control

(Update) In another tumultuous day for the Co-operative, the member-owned organisation has announced a U-turn on the £1.5 billion rescue plan it announced in June for its troubled banking subsidiary. A new plan, likely to be unveiled next week, will see:

  • the Co-operative lose formal control of Co-operative Bank;
  • Unions lament 'tragic' day for mutuality;
  • bond holders in the bank to receive an improved and 'fairer' offer;
  • trading in Co-op permanent interest-bearing shares (Pibs) and preference shares suspended;
  • a £100 million increase in the cost of clearing up payment protection insurance (PPI) mis-selling.

A new bailout for Co-operative Bank

Euan Sutherland, chief executive of the Co-op group, has confirmed the mutual has reached an agreement with bondholders over its £1.5 billion refinancing plan.

In a video statement, Sutherland said he was ‘delighted to announce we have reached an agreement in principle to save Co-op bank’.

He said the new plan would reduce the Co-op group's equity stake in the loss-making bank to 30% although he said it would remain its largest shareholder and retain 'effective control'.

This is very different from the Co-op's original recapitalisation proposals. These would have seen the bank, saddled with bad debts from the takeover of Britannia building society four years ago, partly floated with a 70% stake held by the group.

However, bond holders, led by a group of hedge funds and private equity investors, rejected the plan as too punitive, saying it was unfair that they should provide £1 billion, or two thirds, of the new capital raised and be left with a less secure investment in the bank.

See below for Sutherland's full video statement.

Three goals for new rescue

Sutherland said the new settlement would achieve three goals.

‘Firstly we didn’t turn to the taxpayer, and we haven’t. This is the first bank to be rescued and survive as a standalone entity without taxpayer money,’ he said.

‘Secondly, Co-op group retains effective control and…we have, securing 30% of equity – which makes us the single largest shareholder.’

Lastly the group wanted to ensure ‘we build a fair and attractive proposal for small investors’ said Sutherland.

'Tragic' outcome, says Unite

Unite, a big union representing Co-operative bank workers, said the Co-op's failure to retain a 50% stake in its bank was a blow for the mutual's members, customers and employees.

'The Co-operative Bank with its long and proud history is now at risk of losing all it ever stood for. The ethos of this important organisation must be protected,' said Dominic Hook, Unite national officer.

'This may mean customers will have even less choice on the high street and means we will have yet another finance company seeking shareholder returns over better banking.' 

Bond holders hopeful

Mark Taber, fixed income expert and head of an action group representing private investors, said he was 'tentatively' optimistic about a new rescue plan.

He said one plan, previously suggested, could see Co-op bank bonds swapped for Co-op group bonds to take investors out of the bank altogether.

'The group could offer investors an exchange for bank bonds,' he said, adding that this could be a better outcome as hedge funds, which will have a stake in the bank under the new plan, 'will not be overly sympathetic to retail [private] investors'.

'If investors are left in the bank then the hedge funds will view [retail bondholders] as below them in the capital hierarchy,' said Taber.

He said the group 'owe it' to the investors to offer them a better deal on their bonds. 'The group put them in this mess...[swapping bank bonds for group bonds] would be an elegant way to fix it.'

Bonds suspended as talks continue

The announcement followed a day of intense speculation about the future of Co-op bank. This started with the the BBC's business editor Robert Peston reporting that the group had caved in to demands from leading bond holders to prepare an alternative refinancing plan.

Peston said: ‘After a weekend of intensive talks with Co-op bank’s creditors, Co-op group, owner of Co-op bank, has conceded – or so I am told – that its own plan for rescuing the bank has to be torn up and replaced.'

The news delighted bond holders. With it looking likely that their contribution to the fund raising would fall, the price of the Co-op 5.5555% Pibs jumped 4.59p, or 12.43%, to 41.5p as investors rushed to buy.

This prompted the Co-operative to ask the City regulator, the Financial Conduct Authority, to suspend trading in its 10 bonds while the new deal was hammered out.

The bank later confirmed in another statement to the stock exchange that following 'engagement' with bondholders it would not go ahead with its original fund raising for the bank.

'The group has stated that it currently expects that many elements of any recapitalisation plan will be materially different to the outline provided on 17 June 2013, while still meeting the additional £1.5 billion common equity tier 1 capital requirement.'

Bondholder groups expect details of the new recapitalisation plan will be announced on 28 October although Co-op has not confirmed this.

'Untidy' situation for investors

Rik Edwards of stock brokers Canaccord Genuity said the circumstances of the suspension of the bonds were 'untidy to say the least'.

The Co-op Group's retreat came after an assortment of hedge funds and private equity groups, who had built up big positions in its bonds, threatened to seize control of the Co-op Bank.

Hedge funds Silver Point and Aurelius had in recent weeks emerged as champions for bond holders who resented what they saw as the Co-op imposing disproportionate losses and leaving them with a less secure investment in the bank.

Bondholder resistance forced the Co-op to install an independent board to review the plan and the various alternatives that investor groups have put forward.

News of the suspension came as the bank revealed its bill from mis-selling payment protection insurance (PPI) had risen a further £100 million to nearly £300 million.

PPI costs make up just one part of the £1.5 billion the Co-op needs to raise. The breakdown of its capital shortfall relates to: £900 million of loan losses largely arising from the Britannia acquisition; £300 million cost of a scrapped computer system; £200 million of PPI pay-outs; and £100 million for the failed attempt to buy a network of branches from Lloyds bank.

Despite the new blow to its finances, the Co-op said its other banking regulator, the Prudential Regulation Authority (PRA), had not requested it to raise more money.

31 comments so far. Why not have your say?

Keith Cobby

Oct 21, 2013 at 11:37

Nothing very ethical about the Co-op Bank. Time it is wound up methinks.

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DNA

Oct 21, 2013 at 16:02

It's not the bank, it's the owners, Co-Op Group. Another case of a bank being run by non-bankers and surprise, surprise, a cock-up ensues ... or in this case, several. The Co-Op board should be held accountable not the bond holders.

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Laughton

Oct 21, 2013 at 17:29

Gosh - jolly confusing.

Glad I can look forward to the promised, paid for, independent financial advice so that I will know what to do.

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peter hart

Oct 21, 2013 at 17:35

No free lunches. If someone offers you a building society at a knock down price best decline.

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Peter Lawless

Oct 21, 2013 at 17:36

And 'real' bankers don't cock things up ? Short memory or what ?

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Malcollm Hurlston

Oct 21, 2013 at 17:40

This highlights the problem of voting rights and speculative investors. Too late now for the Co-op but there needs to be a delay of some months before new purchasers of quoted equity or bonds can enjoy the vote as well as the economic rights.

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Rob Walker

Oct 21, 2013 at 18:06

"This is the first bank to be rescued and survive as a standalone entity without taxpayer money" - someone has a short memory eh? What about the much-maligned capitalist pigs at Barclays? ...and as for the Unite bloke's comment of how the bank :"is now at risk of losing all it ever stood for" well the bank obviously stood for screwing loyal investors with a few spare bob to put aside. I'm not sure how 'ethical' that was....screw you!

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Peter Lawless

Oct 21, 2013 at 18:15

Let them have some of the £1.4 trillion the 'real banking bankers' were bailed out with, or has that already been used up in bonuses ?

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Chris Kenney

Oct 21, 2013 at 18:17

As said above, nothing very ethical about the Co-op bank.

Its interesting though that the newspapers were trumpeting how marvellous they were at the height of the banking crisis, as the loan book was sound. This was the way banking should be! Turned out they were so stupid that they could not do a proper due diligence on the Britannia. Just the same as any socialist council or government, innumerate at heart.

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Peter Lawless

Oct 21, 2013 at 18:32

£1.4trillion bank bail-out ? How did that happen ?

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Ian Phillips

Oct 21, 2013 at 18:32

What this needs is a "financial expert" to sort this out.....what's Gordon Brown doing these days? ......he must be an "expert" in this.....after all he created it!!

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Peter Lawless

Oct 21, 2013 at 18:45

What strange view of history you have ! It was however a 'socialist' chancellor who found the £1.4 trillion to bail out the casino bankers. Should he have let them go bust ? Bankers bonuses have recovered more quickly than the banks have, and none of these people have gone to jail as they should have.

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J. Wright

Oct 21, 2013 at 19:29

Is it the Coop Group or the Coop Bank who are ethical?

Is it the Coop Group or the Coop Bank who have given £170,000 to Balls to run his office?

Is it the Coop Group or the Coop Bank whose directors attempted to buy 500 branches from Lloyds Bank without having the capital to do so.

Is it the Coop Group or the Coop Bank whose directors will be banned from holding office due to their incompetence when the Bank of England gets round to regulating these things properly.

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Chris Kenney

Oct 21, 2013 at 19:31

I thought that reason the big banks had to be bailed out was that they were both wholesale and retail bankers. As I don't believe the Co-op were really in that category I don't suppose that it matters if they fail, as long as the depositors are compensated.

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Peter Lawless

Oct 21, 2013 at 19:55

"I thought that reason the big banks had to be bailed out was that they were both wholesale and retail bankers" No, they gambled the bank on high-risk investments and became skint. Pure bonus-related greed

"Just the same as any socialist council or government, innumerate at heart. "

Interesting that the LSE Growth Commission, a mix of academics, business leaders,economists and banking experts take an overwhelmingly positive view of the Labour government's economic performance between 1997 and 2010. This view was shared by Professor Vernon Bogdanor who was David Cameron's tutor at Oxford. The Commission's conclusions were wide-ranging but I won't let the facts get in your way, unless you ask me to.

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alan franklin

Oct 21, 2013 at 19:56

Any bad bews about the Socialist-run Co-op is good news for me, stuffed as it is with politically correct nincompoops who collectively couldn't run a bath.

I know some of these people and they make the Dave Spart character in Private Eye look like a genius in comparison.

They are the same sort of numbskulls who attend branch union meetings and pass ridiculous motions. "Basically er...."

May their demise be swift. Byeeeee!

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george renshaw

Oct 21, 2013 at 19:58

I can't make up my mind if the hedge funds are more like hyenas than vultures, but one thing's for sure - they smell blood.

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andrew barlow

Oct 21, 2013 at 20:42

Hi

How is the insurance part doing? Any comments please!

AB

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Peter Lawless

Oct 21, 2013 at 21:09

Sorry Andrew, I don't know !

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AMS

Oct 21, 2013 at 21:19

Retail holders of the banks subordinated debt (many of whom purchased their investments blind to the capital black hole in the co-ops balance sheet - information which should have been in the public domain at a far earlier stage) appear to be drawing a collective sigh of relief.

This is one group of individuals (private investors) for whom the hedge funds, in conjunction with the tireless and laudable efforts of Mark Taber, have provided a valuable service - (albeit indirectly in the case of the vultures and of course most definitely directly RE Mr (soon to be Knighted for services to mankind) Taber).

Mr Sutherland appears to have requested the trading suspension of the co-op bonds to prevent any further individuals making a quick buck.....

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John via mobile

Oct 21, 2013 at 23:49

I am utterly disgusted with the Coop right now. Although the Coop bank is legally a plc, wholly owned by the Cooperative Group which is member owned.

I think they should get their members to vote on this proposal to see if they agree to this, like the bondholders have disagreed to taking a loss of their investments.

Financial investments are a risk, the bond holders should of known this and if the Coop bank was already listed on the stock exchange, these investors would have, if they owned shares, would of been expected to raise money for the Coop Bank to plug the £1.5bn by buying more shares through a rights issue or face their shares being dilluted in exactly the same way as being issued new bonds!

Scandaless!!!!

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Ladysaver

Oct 22, 2013 at 00:14

I laughed out loud at Unite's comment. No comment on the debacle itself or how the Co-op Bank got itself into this mess - just a sodden handkerchief for mutuality: "The Co-operative Bank with its long and proud history is now at risk of losing all it ever stood for. The ethos of this important organisation must be protected". Er, protected by whom, exactly? It should have been protected by its management, who clearly failed abysmally. I remember when the Co-op Bank took over Britannia. The announcements were full of the 'ethos of mutuality' these two orgs shared. Nothing, repeat nothing, in the bumf about the reckless lending that led Britannia (once one of the UK's top 5 BS) to ruin. The 'mutuality ethos' seems to have been prized to the exclusion doing the job of running an organisation properly. If it's been wrecked now, it's their own fault. Ethics, schmethics. The Co-op Bank has talked a fine talk about ethics for decades, but clearly forgot what the word means in practice.

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snoekie

Oct 22, 2013 at 00:16

No surprise in the comments from the Unions, who probably cannot add 3+3.

They have demonstrated their grasp of business, zero, zilsch, nothing **ck all minus 1 million %. Unions are Spanish practice driven, communist in belief and isch, isch, isch (self) driven.

Little wonder they have destroyed what were productive industries and driven the jobs abroad, and they congratulate themselves as having protected their workers rightd. Yep, the workers lost their jobs and the union leaders strolled off into the sunset congratulating themselves on how well they had done for themselves in their pay and pension (over the bodies of their members), whilst destroying the jobs of those they were supposed to represent.

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Pilgrim

Oct 22, 2013 at 01:04

Looks like things are moving in a helpful direction.

But still all fudging and fumbling.

What is the point of having regulators and their micro regulations if the regulator not only fails to protect the public interest, but actually acts imprudently and aggravates the problems?

Viz the failure of the FSA to maintain normal scrutiny over the Coop bank because it formed a part of a larger mutual conglomerate, the failure of the PRA to act until after a ratings agency identified the risks presented by the Coop in the 'Verde' proposal to acquire the Lloyds Bank branches, the imposition of unreasonably harsh capital requirements (tougher than Basel 3), ..., one can go on and on Irresponsible conduct and failings by the regulator have been instrumental in magnifying the problems of the Coop Bank.

Why did the PRA and the FCA give comfort to the clearly unsuitable plan for recapitalization first presented by the Coop?

Do you ever got a straight response out of either of these seemingly useless sinecures, the PRA and the FCA? If so, you will have done better than me (I have received replies from both, but no answer to any of the questions asked!).

Where is it explained to holders of the former Pibs how it is that bonds which were designed to form a part of the core capital of the bank can be seized to strengthen the core capital? The Coop (ex Pib) bonds are not excluded from counting as core capital by the Basel accords nor by the related European draft directives. These make provision for the inclusion of instruments that are wholly forfeit at point of insolvency within ET1. See for example : http://www.slaughterandmay.com/media/1921430/regulatory-capital-eligibility-requirements-for-banks-the-changing-landscape.pdf

On my reading, the former Pibs do meet the requirements for inclusion within the broader measure of T1. See also the discussion of grandfathering and the extended transition timetable.

Nor is it explained what the formal role of the Trust Deed and the existing contractual agreements are when the the new regulations conflict and depart from the terms of the pre-existing arrangements. It is all very well the PRA (aka the Bank of England) arbitrarily chopping and changing the rules, but where does it leave the Trust deeds? Are these now to be re-written, not just in the case of the Coop but for every similar financial instrument?

The Trust Deed for Co-op sub bonds (the former Pibs) is a fairly shoddy document. But it includes an undertaking that payment of the dividend will not be suspended if the bonds should cease to qualify as tier 1! In the event this undertaking has been completely ignored, unless, that is, the bonds do continue to qualify.

What is the role of the Trustee in the brave new world being contrived by the PRA? How is a retail investor meant to appraise the risk of an investment when it appears that the principal risk is of arbitrary interventions by the regulator changing the terms of the investment?

How does it improve confidence in banking when a meddlesome regulator forces a solvent bank into default?

The problems of the Coop bank have been fully visible to the regulator throughout the evolution of the present situation, but the regulator first failed to intervene, then gave comfort to the hopelessly ambitious scheme to acquire the Lloyds branches, and then suddenly demanded that the Bank come up with a funding plan to meet an unduly harsh requirement for recapitalization. This seemingly has confused an an ideal goal with the minimum required for trading under today's conditions. In other words, if the sky were to fall, the margins of the Coop Bank exposed it to an enhanced risk of bankruptcy, (but the sky hasn't fallen yet!). After all, if all banks are required to operate at all time with the currently preferred level of reserves, then bank defaults and failures will still continue to threaten the market, because all that has happened is that the definition of bankruptcy has been changed!

The regulator failed the policy holders in the Equitable, and after intervention by the Parliamentary Ombudsman HMG agreed to compensate policyholders for somewhat less than one quarter or the losses experienced following the failure of adequate regulatory oversight. It appears that in this instance there has been an even more obvious failure in oversight and action.

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Steve30

Oct 22, 2013 at 08:07

Pilgrim - as usual your commentary is spot on. You should write for the financial press as the hacks simply regurgitate the rubbish that emanates from the PR departments of both the regulator and the culpable organisation.

Now we are getting somewhere with getting rid of the cooperative movement involvement in this bank, maybe we can get on with prosecuting the offenders.

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Steve30

Oct 22, 2013 at 08:22

Predictable hand wringing from Unite - that bastion of worker solidarity which paid their departing leader Derek Simpson £510,659 in 2010 whist their members struggle by often on a minimum wage but still paying their union dues.

Of course Unite doesn't dirty it's hands with capitalist endeavors and it's 2011 -2012 investment income of £5,787,000 was an unfortunate error just like using accounting sleight of hand to avoid paying any tax (nil, zip, zilch) on this profit.

Hypocritical dinosaurs.

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Rory

Oct 22, 2013 at 09:20

For those who have been indoctrinated by those with little grasp of history, the Co-op was a political movement ling before the Labour Party appeared on the scene, However, some Labour officials would like to forget that it was Clement Attlee's government that created the largest venture capital investment trust on the planet -- none other than 3i!

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Peter Lawless

Oct 22, 2013 at 09:32

They should have put the money in the bank. Or under the bed ? How dare they invest it.

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J. Wright

Oct 22, 2013 at 10:43

Is it the Coop Group or the Coop bank which is said to be ethical.

Is it the Coop Group or the Coop bank which gave Balls £170,000 to run his shadow office.

Is it the Coop Group or the Coop bank who decided to take over 600 branches of Lloyds without sufficient capital.

Is it the Coop Group or the Coop bank whose directors will be banned when the Bank of England gets round to taking its regulatory duties seriously.

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Tony Johnson

Oct 22, 2013 at 11:00

I understand KPMG were the auditors throughout this sorry banking fiasco how on earth did they manage to sign off each year without insisting on making provisions for the loans now viewed as irrecoverable. This must have been a developing situation it just didn't happen overnight. Surely the Coop bank should seek recompense

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Peter Lawless

Oct 22, 2013 at 11:13

They might even get knighted for services to the 'Red Shield' (Rothschild) !

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