U.K.’s Co-Op Bank Sees Subordinated Debt Fall 26% on Ratings
Co-Operative Bank Plc, which traces its roots to Britain’s 19th-century industrial north, saw its subordinated debt plunge after a downgrade to junk triggered speculation junior bondholders may be forced to take losses.
The company’s 275 million pounds ($423 million) of 9.25 percent subordinated notes due April 2021 fell 27 pence to 74.9 pence on the pound, according to Bloomberg prices. The have been quoted above par since July. The lender was cut six steps by Moody’s Investors Service to Ba3, which cited the potential for losses on real estate loans and low levels of provisions for future impairments.
Holders of junior bank debt in Europe have been on the alert for writedowns since the Dutch government expropriated about 900 million euros ($1.2 billion) of SNS Reaal NV’s junior debt in February when property losses brought the fourth-largest Dutch lender to the brink of collapse. Irish lenders imposed losses of as much as 90 percent on their junior debt investors as the government pledged 64 billion euros to rescue them following that country’s housing collapse.
“People are concerned the problems at the Co-Op are worse than they had thought,” said Roger Francis, a credit analyst at Mizuho International Plc in London. “Subordinated bondholders in today’s world know that they are the first line of stakeholders to suffer, and the example of SNS is fresh in people’s minds.”
The lender’s senior bonds also fell as investors are wary the securities will leave benchmark investment-grade indexes after the downgrade. Co-Op’s 2.375 percent senior unsecured bonds due October 2015 dropped five cents to 93 cents on the euro, data compiled by Bloomberg show.
The Manchester, England-based bank, which is owned by its customers, said in a statement that it doesn’t need a government bailout. “We plan to significantly simplify our business, which will greatly improve our operational effectiveness and also enhance our capital position in the process,” it said.
The lender may need “external support” if real estate losses escalate, according to Moody’s. Chief Executive Officer Barry Tootell quit after the downgrade, leaving less than a month after the bank abandoned its 750 million-pound ($1.1 billion) bid for 632 Lloyds Banking Group Plc branches.
“Loss sharing is very possible but doesn’t have to follow the SNS model,” said Paul Smillie, a Singapore-based banking analyst at Threadneedle Asset Management. “They’ve been in trouble for a long while and their capital position is very weak.”
Co-Op’s core Tier 1 capital ratio under the latest round of Basel rules was 6.7 percent in January, less than the 7 percent target set by U.K. regulators, Moody’s said.
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