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Co-op faces new challenge over £1.5bn rescue
by Michelle McGagh on Sep 16, 2013 at 12:29
A Co-operative Bank bondholder group has accused the bank of overstating its losses in order to justify its punitive rescue plan.
An institutional bondholder group led by property company CLS Holdings has written to the Co-op questioning the £709 million losses and £379 million of write-offs the bank revealed in its first-half results last month. It also queried whether £230 million of costs that were written off could have been claimed back from the taxman.
Mark Taber, a fixed income expert and head of the separate Co-op retail bondholders campaign group, said he had been in touch with CLS and ‘completely agreed’ with their concerns.
He said the £1.5 billion black hole which the Co-op was trying to fill was made up of £900 million of loan losses, £300 million costs of a scrapped computer system, £200 million of payment protection insurance (PPI) pay-outs and £100 million for a failed attempt to take over 600 Lloyds branches – known as Project Verde.
In order to cover these costs the Co-op proposes a £1 billion debt-for-equity swap where ‘junior’, lower ranking debt such as permanent interest bearing shares (Pibs) and preference shares – which are held by 15,000 investors – are turned into a new financial instrument that will offer them a less secure income. The remaining £500 million will be picked up by Co-op Group.
However, Taber said the group has not factored in any recoveries from these losses and projects and criticised the group for allowing the bank to shoulder such huge financial burdens.
‘What happens if these costs don’t materialise?’ he said. ‘The costs of the loan losses could be overly conservative and the Co-op could sell them on and the new owner could do well on them. This fire-sale of assets could backfire.’
Picking up the tab
Taber accused the Co-op group of foisting the cost of its poor decisions on to the bank and ultimately bondholders. Project Verde was a particularly costly exercise for the company.
When the Co-op decided to bid for the Lloyds branches it was made clear that the £300 million IT costs would not be needed as Lloyds was already developing a new computer system but the group vowed to use the changes to ‘invigorate’ its existing infrastructure. However, Taber said this did not happen and the whole project was scrapped at a huge cost.
Taber also questioned why the £100 million ‘abortive costs’ of Project Verde were so high.
‘£100 million on advisers and the abortive costs of Project Verde – that is a lot of money and what one earth have they got to show for it?’ he asked. ‘Can they not claw some of that money back? They have never answered that question.’
No plan B
Bondholders have had no answer to this question or any other, and Co-op has been resolute that the only rescue plan is the one that it has already outlined. Although details of the plan will be announced at the end of October, the bank has insisted there is ‘no plan B’.
Taber believes that this is a red herring and that there must be ‘flexibility’ in the deal. He agreed with the CLS plan that the debt-for-equity swap should include the creation of a new company that owns 40% of the bank and whose shares are held by bondholders.
‘Bondholders would have a share of [the new company] and there would be separate directors. Then bondholders would have some influence and [the company] could be used as a vehicle if there are any write-backs or recoveries from the IT systems or loans,’ said Taber.
Taber accused Co-op Group of ‘trying to hold a gun to everyone’s head and say there is no plan B’ and threatening a taxpayer bailout if the rescue plan it has set out doesn’t go ahead.
‘I do not think the regulators will let that happen,’ he said.
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On the road
by Danielle Levy on Dec 12, 2013 at 09:03