Co-Operative Cedes Majority Control of Bank Unit to BondholdersHoward Mustoe and John Glover
The Co-Operative Group Ltd. agreed to cede control of its banking unit to creditors after 141 years, part of a deal to allow the lender to plug a 1.5 billion-pound ($2.4 billion) capital shortfall.
Co-Operative Group, a mutual whose businesses range from supermarkets to funeral parlors, will keep a 30 percent stake in Co-Operative Bank Ltd. after reaching an agreement in principal with creditors, Chief Executive Officer Euan Sutherland, 44, said in a statement today. The Manchester, England-based company will remain the bank’s largest shareholder, he said.
The group, which traces its roots to Britain’s 19th century industrial north, had sought to keep control over its banking unit while forcing bondholders to exchange subordinated debt for new equity and senior debt. Bondholders may now seek to find a buyer for the lender, which has 4.7 million customers.
“It’s difficult to imagine a group of bondholders coming together to take over a bank unless they have some comfort, possibly from another party,” said Eva Olsson, a credit analyst at Mitsubishi UFJ Securities in London. “They normally just want their money back,” she said. “To start a bank of that size is very costly and difficult in the U.K. because there are very high barriers to entry.”
An ownership change may also trigger reductions in the size of Co-Operative Bank’s 7,800-strong workforce, according to Andre Spicer, professor of organizational behavior at Cass Business School in London.
“The number of staff the Co-Op employs is likely to drop as management search for efficiencies,” he said. “Staff who remain are likely to find themselves loaded down with various restructuring efforts.”
Regulators pushed Co-Operative Group to close the capital deficit following the failure of the bank’s bid for more than 600 Lloyds Banking Group Plc branches last year, a deal that would have more than doubled its number of outlets.
Co-Operative Group couldn’t plug the gap by turning to shareholders in a rights offering, like competitors including Barclays Plc. Instead, the group pledged 1 billion pounds to the banking unit through selling assets and increasing borrowings, then asked bondholders to provide a further 500 million pounds in a debt swap.
LT2, a group of bondholders who own 43 percent of the lender’s lower tier-2 securities, rejected that proposal and, advised by Moelis & Co., pushed to convert the bank’s subordinated bonds and preferred shares into common stock.
Co-Operative Bank’s 500 million euros ($684 million) of 2.375 percent senior bonds due in October 2015 gained 1.13 cents in the euro to 95.86 cents, the highest since May, according to data compiled by Bloomberg.
Bank of England Deputy Governor Andrew Bailey told lawmakers in July the “main issue” that brought down Co-Operative Bank was the assets it acquired from Britannia Building Society in 2009. Those souring loans prompted Co-Operative Bank to report a fourfold increase in impairments in 2012 and a pretax loss of 673.7 million pounds.
Peter Marks, Co-Operative Group’s former CEO, is slated to give evidence to lawmakers tomorrow about the aborted Lloyds branches purchase.
Separately, the bank said today it will set aside an additional 100 million pounds to 105 million pounds to cover costs such as compensating clients who were wrongly sold payment-protection insurance.