View the article online at http://citywire.co.uk/money/article/a710969
'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.
(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.
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