Photographer: Nigel Rodis/Bloomberg

Co-Op Bank Senior Creditors Jumping Ship as Maturity Nears

Updated on
  • Senior bonds due in September quoted at 86% of face value
  • Manchester-based lender hasn’t ruled out imposing losses

Co-Operative Bank Plc senior bondholders are losing their nerve in the final stretch amid concern the beleaguered U.K. lender will impose last-minute losses.

Co-Op’s 400 million pounds ($498 million) of bonds due on Sept. 20 fell to 86 pence on the pound, compared with 90 pence on March 7 and an average of 98 pence since they were issued in 2010, according to data compiled by Bloomberg. The yield has more than doubled since the start of the year to 39 percent, the data show.

Investors are ditching Co-Op’s senior notes months before they’re set to be repaid as the Manchester-based lender hasn’t ruled out imposing losses as part of a planned 750 million pound recapitalization. Co-Op’s September repayment date is seen as an informal deadline for the bank to raise new funds or ask senior creditors to share the burden if a private solution fails.

“If it goes well, you make 10 points, but if it goes badly, you lose a lot and you lose face,” said Peter Doherty, the chief investment officer of Tideway Investment Partners, which manages over $200 million and considered buying Co-Op’s notes. “They probably will pay the senior but is it worth me taking that risk? Not really.”

Co-Op officials declined to comment on the bond moves or the bank’s plans to repay senior securities.

Default Risk

Co-Op’s notes fell for a seventh day on Tuesday, approaching the record low of 85 pence on the pound reached last month, data compiled by Bloomberg show. They yield more than twice as much as senior bonds issued by distressed Italian banks including Veneto Banca SpA. Bond prices typically move toward 100 as the maturity approaches and the risk of default recedes.

The bank, owned by hedge funds including Silver Point Capital and Perry Capital, has put itself up for sale and may attempt to raise funds by selling new shares and converting debt to equity.

While Co-Op’s 456 million pounds of long-dated junior notes would be first in line for losses and the bank says it has the money to repay senior creditors, Chief Financial Officer John Worth said earlier this month that the senior bonds may not be immune. The Bank of England could impose losses in a worst-case scenario, the Co-Op said.

Forcing losses on senior bonds is a last-ditch solution because it could be legally challenged by investors and would hobble plans to sell 250 million pounds of new junior debt in 2018, said Jakub Lichwa, a credit strategist at Royal Bank of Canada. Analysts at CreditSights and MUFG also forecast that the bonds will be repaid.

Buying Co-Op’s senior bonds is “an interesting, but highly speculative, investment opportunity,” CreditSights’ Simon Adamson wrote in a note last week. “Senior bondholders worry they might be on the hook.”

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