Co-Operative Bank Postpones Coupon Payment on Regulator’s Order

Co-Operative Bank Plc, the British bank trying to plug a 1.5 billion-pound ($2.2 billion) capital shortfall, said the regulator told it to halt coupon payments on some of its bonds until it presents a plan to fill the hole.

Co-Operative Bank won’t pay the discretionary coupon on its 13 percent perpetual subordinated bonds due on July 31 after the Prudential Regulation Authority withheld permission, the lender said in a statement today. Payments will be deferred until the completion of its capital plan in about November, the bank said.

The lender, which traces its roots to Britain’s nineteenth-century industrial north, last month said it will swap some debt for equity and sell its insurance operations to bolster capital after the failure of its bid for 632 Lloyds Banking Group Plc branches exposed the deficit.

“It saves them money,” said Gary Greenwood, a banking analyst at Shore Capital in Liverpool, England. “They said at the time of the restructuring they would seek to save money.”

The lender has about 110 million pounds of the perpetual subordinated bonds outstanding, according to data compiled by Bloomberg.

“In view of the need to preserve capital within the Co-Operative Bank, the PRA has requested the Co-Operative Bank not pay discretionary coupons on its bonds,” Sarah Bailey, a spokeswoman at the PRA, said in a telephone interview today.

Kelly Review

Co-Operative Bank, which is controlled by customer-owned Co-Operative Group Ltd., is seeking to raise 1 billion pounds by asking existing bondholders to exchange subordinated debt for new equity and senior debt, and a further 500 million pounds through the sale of insurance assets. Some of the bank’s shares will also become publicly traded in the restructuring.

The lender also hired Christopher Kelly, the former chairman of the U.K.’s Financial Ombudsman Service, to review how the lender fell short of capital. Kelly will investigate Co-Operative Bank’s decision to merge with Britannia Building Society in 2009 as well as the Lloyds transaction, the Manchester, England-based lender said in a separate statement. He will start in September and report his findings in May.

“As we move forward with implementing the detail of this plan, it is important to learn from the past,” Co-Op Group Chief Executive Officer Euan Sutherland said.

Separately, a group of bondholders hired Moelis & Co. to advise them on Co-Op’s capital plan, the Wall Street Journal reported earlier today, citing two people it didn’t identify.

-- With assistance from Ben Moshinsky in London. Editors: Jon Menon, Simone Meier.

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