Co-Op Bank Starts Sale Process, Mulls Debt for Equity Swap

Updated on
  • U.K. lender hires Bank of America, UBS to start sale process
  • Bank is also considering a liability management exercise

Co-Operative Bank Plc, the British lender that ceded control to its creditors three years ago, is considering swapping bonds for equity to raise capital while also starting a sale process.

Low interest rates hurting earnings and higher-than-anticipated restructuring costs led to a “significant” loss for 2016 and have pushed Co-Op Bank’s board to consider looking for a buyer, the Manchester, England-based lender said in a statement on Monday. The bank is also considering a liability management exercise of its outstanding debt to raise capital as it operates below some regulatory guidance measures of financial strength.

Co-Op Bank has been attempting a turnaround since 2013, when regulators found a capital shortfall, its parent company ceded control to bondholders, and its former chairman resigned following drug allegations in a British newspaper. Ultimately rescued by U.S. hedge funds including Silver Point Capital and Perry Capital, the bank’s plans for an initial public offering have been stymied by charges for mis-sold payment protection insurance and the cost of upgrading crumbling IT systems.

“Today’s news is a reckoning with a dire situation,” analysts at MUFG led by Rick Mattila wrote in a note to clients. “We don’t see the Co-Op bank’s business as being particularly attractive for other banks given its specificities of being a cooperative bank. Perhaps a specialized private-equity investor could see more upside in the medium long term.”

The bank’s 250 million pounds ($313 million) of subordinated bonds due July 2025 gained 4.7 pence to 49.7 pence on the pound following news of the sale or capital raise, according to data compiled by Bloomberg. Some 400 million pounds of senior bonds maturing in September jumped 2.8 pence to 88.3 pence, with a yield of about 28 percent. Although 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 Ratings.

Read more: Co-Op Bank’s shrinking value in recent months

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, though it’s in breach of individual capital guidance and combined buffer requirement.

The company has hired Bank of America Corp. and UBS Group AG to advise it on both the sale and a possible capital increase, according to Monday’s statement. The lender is looking for a buyer at the same time as Royal Bank of Scotland Group Plc seeks to sell its Williams & Glyn consumer bank, a rival northern-England lender, in order to meet a European Union deadline to dispose of the business by the end of this year.

Liam Coleman

Photographer: Thomas Temple/Co-Operative Bank Plc

Turnaround Plan

“We have made great progress over last three years of our turnaround plan albeit we have found some challenges,” Chief Executive Officer Liam Coleman said on a call with reporters. “Clearly we would consider an equity provision from either our existing shareholder base, potentially new shareholders or some combination of both. We’ve also indicated that may include reviewing our existing security liability stack in terms of our existing debt securities.”

Co-Op Group, the funeral care to supermarkets operator, has a 20 percent stake in the lender. The lender, which doesn’t trade publicly, has slumped in value to as little as 45 million pounds in recent weeks, people familiar with the matter have said.

Chairman Dennis Holt said on the call with reporters that The Bank of England’s Prudential Regulation Authority hasn’t pushed the lender to sell itself, saying it was a board decision. The bank said it has not canvassed shareholders over its plans for a sale or liability management exercise and will seek feedback before deciding whether to sell the company or raise capital over the coming weeks and months.

“The PRA welcomes the actions announced today by the Co-Operative Bank, a spokesman for the regulator said in a statement. “We will continue to assess the bank’s progress in building greater financial resilience over the coming months.”

(Updates with analyst comment in fourth paragraph.)
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