Co-Op Bank Is Said to Be Valued at as Little as $56 Million

  • Lender’s equity value said to have plummeted in recent months
  • U.K. lender running below regulatory capital requirements

Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, has plunged in value to as little as 45 million pounds ($56 million), according to people familiar with the matter.

Shares in the Manchester, England-based lender, which don’t trade publicly, are quoted between 10 pence and 30 pence by investment banks offering private trading among institutional investors, said the people who asked not to be identified because they weren’t authorized to speak publicly. The shares were worth about 3 pounds after the bank was rescued by bondholders in 2013, falling to about 50 pence in September before plummeting in recent weeks amid questions over its financial strength, the people added.

Co-Op Bank will probably operate below regulatory capital guidance until at least 2020, the bank said Jan. 26, as it replaces crumbling IT systems and separates its pension fund from its former parent. The lender is “reliant on the forbearance” of the Bank of England’s Prudential Regulation Authority, though it will probably be given time to recover rather than be placed in resolution, analysts at CreditSights Ltd. in London wrote in a note to clients this week. Even so, it has a limited “margin of safety” to remain viable, Fitch Ratings Ltd. said Jan. 30.

Co-Op Bank had total lending of 19.6 billion pounds, deposits worth 22 billion pounds and 1.4 million current account customers at the end of June, according to company filings. The lender meets its so-called Pillar 1 capital requirement and liquidity obligations, but is in breach of individual capital guidance and combined buffer requirement, which the PRA expects all banks to meet. Co-Op Bank is blocked from paying bonuses until it meets its CBR.

‘Not Convinced’

If the PRA wanted to put the lender into resolution, a process which would involve losses for bondholders, “it could use the excuse that the Co-Op Bank no longer meets its combined buffer requirement,” Simon Adamson, an analyst at CreditSights, wrote in the note to clients on Feb 5. Although Co-Op Bank is reliant on the forbearance of the PRA, “we are not convinced that the recent update, which foresees an even longer period of non-compliance than originally forecast, will be enough to change the PRA’s stance.”

The plunge in the value of the bank’s equity reflects the potential for losses for its shareholders, which include U.S. hedge fund Silver Point Capital and Perry Capital. Co-Operative Group, a firm that operates everything from supermarkets to funeral care businesses, used to control the lender but ceded majority ownership to bondholders in 2013 to help plug a 1.5 billion-pound capital shortfall. 

While the Co-Op Group in July wrote down the value of its 20 percent stake to 140 million pounds from 185 million pounds following Britain’s vote to leave the European Union, its present market value would be as little as 9 million pounds. There is currently little trading at those levels, according to a person familiar with the matter. A spokesman for the bank declined to comment.

Co-Op Group Chairman Allan Leighton told reporters on Tuesday he was “very open minded” about a potential sale of the company’s stake in the bank. He said the firm would support a disposal that was in the best interests of its customers and members, adding, “I doubt there’ll ever be a future where we own a bank again.”

Record Low

The value of the Co-Op Bank’s junior bonds has tumbled to a record low amid reports in British newspapers that the BOE could intervene if the lender’s turnaround plan fails. The firm is working on a fresh plan to present to the central bank this month ahead of an update for investors alongside annual results in March, according to people familiar with the matter.

The bank’s 206 million pounds of junior bonds due December 2023 dropped 4 pence to 45 pence on the pound on Wednesday, according to data compiled by Bloomberg, while 400 million pounds of senior bonds maturing in September this year were little changed at 85 pence, with a yield of 34.5 percent. While the bank has enough cash and liquidity to repay the September bond, its future access to funding is correlated to its capital position, which is deteriorating, according to Fitch.

A so-called resolution of Co-Op Bank would be the first major test of the BOE’s powers to impose a restructuring and recapitalization under rules designed to end too-big-to-fail taxpayer bailouts. Rival lenders could consider an acquisition of the firm, although they would probably demand a low valuation or wait for the BOE to force a sale, according to bankers.

Problems ranging from the bank’s IT system to the way it models credit risk and the separation of its pension fund from the Co-Op Group mean the BOE requires the bank to hold more capital because of the potential risks each issue presents to its business, according to company filings. The PRA increased its so-called Pillar 2A capital requirements, financial buffers linked to a lender’s idiosyncratic risks, to 14.1 percent of risk-weighted assets in November. By contrast, the level set for Lloyds Banking Group Plc, Britain’s largest mortgage lender, is 4.5 percent.

As Co-Op Bank fixes each of the issues, the regulatory capital requirements are expected to fall. The bank is upgrading its IT systems this weekend, according to a statement on its website.

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