Photographer: Simon Dawson/Bloomberg

Co-Op Bank Agrees $898 Million Capital Plan With Investors

  • Junior bondholders raise 443 million pounds in debt-swap deal
  • Sale of 250 million pounds in new shares led by bondholders

Co-Operative Bank Plc reached agreement with investors on a 700 million-pound ($898 million) recapitalization plan, enabling the U.K. lender to avoid being broken up by regulators.

The deal will involve a debt-for-equity swap for junior bondholders to raise 443 million pounds, while 250 million pounds of new shares will be sold, the Manchester, England-based bank said in a statement on Wednesday. The bank will split its pension program from the Co-Op Group supermarket chain, its former parent.

Co-Op Bank’s recapitalization three years after it was last forced to plug a capital shortfall, helps the 145-year-old company avoid a similar fate to Spain’s Banco Popular Espanol SA, which suffered a fire sale directed by regulators earlier this month. Faced with losing all their investment, Co-Op Bank bondholders led by U.S. hedge funds Silver Point Capital, GoldenTree Asset Management, BlueMountain Capital, Anchorage Capital Group and Cyrus Capital Partners are advancing the rescue package.

“They are described in some parts of the media as vulture funds, but I would say to you that these people are long-term committed investors,” Co-Op Bank Chairman Dennis Holt said on a call with reporters. “They’ve supported this bank through very difficult times, and they are continuing to support us now that we’ve built strong foundations to take it further forward.”

Investor Support

The recapitalization proposal has support from 47 percent of junior bondholders and 52 percent of shareholders, including Co-Op Group. Institutional junior debt investors will receive shares representing about 17.4 percent of a new holding company. Consumers owning the bonds are expected to get about 45 percent of the nominal value of their 2023 notes, subject to an overall cap of 13.5 million pounds.

The bank will sell about 250 million pounds of new shares in a process due to complete by the start of September. Co-Op Group’s stake in the bank will fall to 1 percent from about 20 percent, meaning it will lose the right to nominate directors to the company and the promotion of the bank’s services to its customers will “come to a formal end in 2020,” according to the statement.

“This is probably the best outcome for the bank and for its senior bondholders, avoiding the need for regulatory intervention,” Simon Adamson, an analyst at Creditsights wrote in a note to clients. “We remain unconvinced about the longer-term viability of Co-Op Bank as an independent institution, but this recapitalisation should enable it to meet regulatory capital requirements in the short to medium term.”

The Bank of England’s Prudential Regulation Authority said in an email that it accepted the financial plan and “will remain closely engaged with the bank while the actions announced today are taken forward.”

Cut Ties

Co-Op Bank’s latest rescue package comes after an earlier funding shortfall in 2013 led the bank to cede control to bondholders, including the U.S. hedge funds supporting the latest capital injection.

Even though the bank is severing ties with its former parent company, Holt said the company would retain the Co-Operative brand. The name is typically reserved under U.K. government rules for customer-owned firms linked to the co-operative movement, which was started by factory workers and farmers in 19th Century northern England as a way to trade more ethically.

The U.S. hedge funds are committed to the bank’s co-operative values and ethics, which are “embedded in the DNA of this bank,” Holt said.

Read more: How hedge funds are seeking control of the bank

The bank on Monday scrapped a plan to sell itself and said it’s pushing for a “mid-single digit” return on equity, a measure of profitability, within four years. That’s below targets of at least 10 percent set by other major British lenders. Co-Op Bank has said it doesn’t expect to pay a dividend until at least 2021.

Co-Op Bank’s debt investors had pushed to extricate the bank from Co-Op Group’s retirement plan. That’s partly because the burden of the pensions program could have made it harder to sell the lender as a standalone operation in the future, according to people familiar with the matter.

The pension fund will be split into sections under the same plan so that 21 percent of the assets and liabilities will be allocated to the bank, while removing the lender’s obligations to support the group’s commitments to former staff. Co-Op Bank will provide 100 million pounds over 10 years in deficit recovery contributions to the program, while it’s also committed to provide initial collateral of 216 million pounds from the point of separation.

Holt said the U.S. hedge funds haven’t indicated that the company will go public or be sold in the near future.

“There is no gun held to our head,” Holt said. “Our investors recognize that this is a long-term commitment.”

— With assistance by John Glover

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