Co-Op Bank Bondholders to Ask to Modify Terms of Exchange

Bondholders seeking control of Co-Operative Bank Plc in a debt-for-equity swap want to alter the terms to reduce windfall gains other investors would pocket.

Co-Operative Group Ltd., based in Manchester, England, has asked bondholders to accept shares in the lender as it seeks to plug the bank’s 1.5 billion-pound ($2.5 billion) capital hole following provisions for bad loans, writedowns on computer systems and compensation to customers who were mis-sold loan insurance. The debt-for-equity swap is being led by a group of investors known as the LT2 Group, which holds about 48 percent of the notes subject to the exchange.

“There’s been a lot of interest among hedge funds, private offices and the like because they’ve seen the chance to make some easy money,” said Amit Staub, a portfolio manager at ECM Asset Management Ltd. in London. “Now they’re trying to push the door shut.”

Under the original terms, holders of dated subordinated bonds will swap their notes for a combination of new 11 percent securities due 2023 and 112.5 million shares in the bank priced at 7.77 pounds a share. They are also entitled to buy an additional 62.5 million shares paying 2 pounds apiece, as long as they are willing to buy 100,000 pounds of them.

Revised Terms

Under the revised terms proposed by LT2, investors swapping their bonds will get 100 million pounds of new bonds and 141.66 million new shares representing a 56.67 percent stake, according to a statement from the Co-Op Group. That will reduce the price per share to 6.17 pounds, according to the statement.

They will also be entitled to buy 33.33 million new shares at 3.75 pounds a share, according to the statement. The cheaper shares represent a 13.33 percent stake, down from the 25 percent under the original terms of the transaction.

Assuming the lender’s book value is 1.5 billion pounds and that the stock will eventually trade at a price of about 70 percent of that, under the existing terms of the exchange an investor would be able to get about 270,000 pounds of new stock and bonds for 175,000 pounds, a profit of 95,000 pounds, according to Staub. Under the revised terms, that profit would fall to about 10,000 pounds, he said.

The court overseeing the deal must approve the changes, and a hearing is expected on Dec. 2. The modification won’t proceed if implementing it would push the completion of the debt-equity swap past the Dec. 31 deadline, according to the statement.

LT2 Group

“We want to respect the original time scale agreed on,” said Russ Brady, a spokesman for Co-Op Bank in Manchester. “The key thing is to get the recapitalization done and move on.”

The LT2 Group at the outset included Aurelius Capital Management LP, Canyon Capital Advisors LLC and Silver Point Capital LP. The Financial Times reported today that Aurelius sold almost its entire stake to Perry Capital, which is locked into the terms of the restructuring.

“The LT2 Group confirms its support for the recapitalization of the Co-Op Bank and for the proposed amendment,” the investors said in a statement today. “The LT2 Group is fully supportive of the new management team.”

The only securities affected by the proposed changes are the bank’s dated subordinated bonds, according to the statement.

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