Wednesday, 10 May 2017

Hedge funds table proposal to resolve Co-op Bank impasse

The American hedge funds which helped to rescue the Co-operative Bank from collapse four years ago have tabled a secret proposal to restructure the beleaguered lender's finances.
Sky News can reveal that a group of bondholders and shareholders advised by PJT Partners lodged an offer with the Co-op Bank's board and its advisers late last week.

The hedge funds, led by GoldenTree Asset Management and Silver Point and advised by PJT Partners and Promontory Financial, are understood to have offered to inject substantial new funds to shore up the Co-op Bank's balance sheet.

Many of the details of their proposal were unclear on Tuesday, although one insider said that it involved a smaller sum than the £300m of new equity that the Co-op Bank had previously signalled it would require.

The response of the bank's board was also unclear, but the source described it as a "credible and serious offer that addresses regulators' concerns".

The hedge funds already hold 80% of the Co-op Bank's shares, and their proposal would inch them closer to full ownership, since the Co-op Group is unlikely to inject any new money into the lender.

The emergence of the hedge funds' offer comes a fortnight after Sky News reported that the prospects of an outright sale of the bank had dwindled as both it and the hedge funds hired advisers to work on a restructuring known as a liability management exercise.

A statement could be made by the Co-op Bank as soon as Wednesday to say that it has accelerated discussions with other providers of capital as an alternative to an outright sale process.

Virgin Money and others had tabled indicative offers to acquire parts of the Co-op Bank, but this week's announcement could acknowledge that a sale of the entire issued share capital of the company is now unlikely.

In March, the Co-op Bank said it would require between £700m and £750m of new top-quality capital, the majority of which would be generated by exchanging some of its debt securities for equity.

The remainder - between £250m and £300m - would come from issuing new shares.

Last month, the Co-op Group wrote off the remaining value of its 20% shareholding in the Co-op Bank - incurring a £140m hit which plunged the supermarkets-to-insurance mutual to a statutory annual loss.
The Co-op Bank has been hit by a string of legacy issues, as well as the challenge posed by ultra-low interest rates, since its £1.5bn bailout in 2013.

Further equity has been raised since then.

The Bank of England is taking a close interest in the sale process, with the former having engaged Deutsche Bank to advise it.

The Co-op Bank's huge pension liabilities, and their joint 'ownership' with the Co-op Group, remain among the major obstacles to a sale.

The lender announced an annual loss this year of £477m, taking its total losses since its rescue in 2013 to well over £2.5bn.

If new capital is not forthcoming, regulators would have little choice but to put the Co-op Bank into a resolution process, which would involve an orderly wind-down of the company's operations.

At that point, the likes of Nationwide or Virgin Money could be asked to step forward to take on some or all of the Co-op Bank's four million customers.

A number of other parties, including OneSavings Bank and Santander UK, are more interested in acquiring individual loan portfolios from the Co-op Bank.

The Co-op Bank's balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.

Its former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs.

SKY     News.

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