Co-Operative Bank Plc, a British lender with 4.7 million customers, said it risks failing unless bondholders approve a debt exchange to plug a capital shortfall after its first-half loss widened.
The company is in talks with bondholders to swap some debt for equity to plug a 1.5 billion-pound ($2.3 billion) deficit identified by regulators and expects to make a formal offer at the end of October, Co-Operative Group Chief Executive Officer Euan Sutherland told reporters on a conference call today.
“The execution of the exchange offer is vital,” the lender, which traces its roots to Britain’s 19th-century industrial north, said in a statement. “We will not remain a going concern without it.”
Co-Operative Bank is being pushed by regulators to bolster capital after the failure of its bid for 632 Lloyds Banking Group Plc branches exposed the shortfall, which stems from the Manchester, England-based company’s purchase of Britannia Building Society in 2009. The lender posted a 496 million-pound writedown, mainly due to souring loans from Britannia.
Co-Operative Bank is trying to raise 500 million pounds by asking existing bondholders to exchange subordinated debt for new equity and senior debt. The lender has said it needs holders of about 1.1 billion pounds of the 1.3 billion pounds of debt outstanding to approve the plan. If the bank fails, it could be put into the Bank of England’s Special Resolution Regime, which allows the authorities to wind up troubled lenders while offering some protection to depositors.
At least three groups of bondholders are seeking better terms. Mark Taber, an investor leading one of the groups, has pressed the Prudential Regulation Authority to review the plan. The bank has 7,000 bond investors with holdings of less than 25,000 pounds each.
“The numbers may well serve as a reminder to the subordinated bondholders about the parlous state of the Co-Op and encourage them to participate in the exchange rather than engage in litigation,” said Roger Francis, a credit analyst at Mizuho International Plc in London.
Parent Co-Operative Group is standing “firmly” behind the bank, making a 1 billion-pound contribution, Sutherland told reporters on the call. Co-Operative Group won’t pledge additional money, he said.
“There is no Plan B,” Sutherland said. “Plan A is the recapitalization of the bank; it’s being done in conjunction with the Bank of England.”
Co-Operative Group has overhauled the bank in the past three months, installing Richard Pym as chairman and Niall Booker as CEO. It’s preparing to cut jobs and close branches to reduce costs. Last month, it hired Christopher Kelly, the former chairman of the U.K.’s Financial Ombudsman Service, to review how the bank fell short of capital.
Since the swap was announced in June, retail depositors have been “markedly loyal,” Booker said. Some corporate clients have pulled cash since the lender’s credit rating was cut to junk in May, he said, without giving figures.
The bank’s loss after tax increased to 781.5 million pounds in the first half from 45.3 million pounds in the year-earlier period. The company also wrote down the computer systems it developed as it planned to expand by 148.4 million pounds. It also set aside 61 million pounds to compensate customers mis-sold payment-protection and credit-card identity theft insurance as well as interest-rate swaps.
About half of the writedown stemmed from “a more proactive stance” in overseeing the loan book, said Booker, who joined in June. About a quarter of the writedown was due to “further deterioration” in the loan book in first half, he said.
Souring loans have depleted the lender’s capital to the point that it fell short of the target set by the PRA in June. The lender said it will fail to meet its 9 percent core Tier 1 capital ratio target by the year-end. It will still be above the regulator’s 7 percent minimum as long as bondholders agree to the swap, the lender said.