U.S. Hedge Funds Walk Tightrope for Control of Co-Op Bank

Updated on
  • Leading bondholders want ownership without partner, people say
  • Investors pushing to inject less capital than BOE demands

Co-Operative Bank Plc’s U.S. hedge-fund owners are treading a fine line as they attempt to secure control of the British bank that put itself up for sale amid a capital shortfall.

Some of the top bondholders -- led by Silver Point Capital, GoldenTree Asset Management, Cyrus Capital Partners and BlueMountain Capital -- are pushing to rescue the Manchester, England-based bank for less money than demanded by the Bank of England, according to people familiar with the matter. They also want control without the participation of an external buyer, said the people, who asked not to be identified because the matter is confidential.

Rejecting the help of an acquirer marks a high-stakes approach from the investors, who risk losing the value of their bonds should the BOE refuse their offer to inject less capital into the bank than originally sought. The 145-year-old British lender could follow Banco Popular Espanol SA as the next European bank to test post-crisis reforms to prevent taxpayer bailouts. 

Co-Op Bank needs a buyer or has to raise as much as 750 million pounds ($957 million) to avert the BOE’s Prudential Regulation Authority forcing a so-called resolution of the bank. Under such as scenario, the central bank would broker a fire sale of assets with steep losses for bondholders. Spain’s Popular is being forcibly acquired by Banco Santander SA for just 1 euro, while investors in about 2 billion euros ($2.2 billion) of junior notes will lose everything.

For more on how Spain’s zombie bank rescue snared bondholders, click here

The hedge funds’ approach comes after the bank received offers from buyers that would include a so-called liability management exercise, which typically involves swapping debt into shares to raise money. About 450 million pounds could be generated from converting junior bondholders, and the bank has previously said it needs about 300 million pounds from selling new stock to satisfy the PRA.

Although ready to accept shares for their bonds, Co-Op Bank’s leading junior debt investors would prefer to buy the new shares without a strategic investor taking a stake alongside them, people familiar with the matter said. But they don’t want to provide the full 300 million pounds and are lobbying regulators to inject less money, the people added. A spokeswoman for Co-Op Bank declined to comment.

The hedge funds are working with Paul Taubman’s PJT Partners to help with their bid and regulatory consultants Promontory Financial Group to lobby the central bank, according to the people familiar with the matter. Although Co-Op Bank is still in talks with potential bidders, a rescue package from the bondholders could be accepted as an alternative as soon as next week, the people added.

Coupon Payments

Co-Op Bank Chief Executive Officer Liam Coleman may seek a deal before the bank is required to pay about 26 million pounds in coupon payments due on June 20 and July 1 for two junior notes, people familiar with the matter have said. The bank also has 400 million pounds of senior notes that mature in September.

Co-Op Bank’s senior bonds due Sept. 20 jumped 1.8 percent to 95 pence on the pound on Friday, compared with a record low of 82 pence on March 30 and an average of 98 pence since they were issued in 2010, according to data compiled by Bloomberg. The yield has fallen in recent weeks after more than doubling since the start of the year amid speculation over the bank’s future, the data show.

While its bondholders are pushing for control, the bank has also drawn interest from a consortium including Qatar’s Al Faisal Holding and Interritus Ltd., which is run by German financier Patrick Bettscheider, according to people familiar with the matter. Bankers at Barclays Plc are advising the group’s approach, according to the people.

However any deal will need to satisfy shareholders, which include many of the U.S. hedge funds that own the bank’s bonds. The Co-Operative Group supermarket chain, the bank’s former parent company, could drop to less than 5 percent of the company after a rescue, from 20 percent, Sky News reported on Wednesday. Co-Op Group wrote down the value of its shares to zero from 185 million pounds earlier this year.

Co-Op Bank is working with Houlihan Lokey Inc. for its dealings with bondholders, according to people with knowledge of the matter, while UBS Group AG and Bank of America Corp. are also advising the company.

The CEOs of several small British lenders from OneSavings Bank Plc to Metro Bank Plc have said they would be interested in acquiring Co-Op Bank’s assets if the BOE ultimately breaks up the lender. However, they’re not interested in buying the entire bank because of the risks related to integrating its computer systems.

Metro CEO Craig Donaldson said in April he would consider acquiring Co-Op Bank loan books, if they have “the right risk and return.”

(Updates with bond price in ninth paragraph.)
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