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The largest group of Co-op Bank bondholders today called on the board of the troubled bank to engage with it over a new £1.5 billion bail-in plan it has produced.
The group, calling itself LT2, said it held 43% of the bank’s lower tier 2 bonds, which means that it could block the Co-op Group’s own proposal to fill its £1.5 billion capital gap. This would force bondholders to take a haircut and see Co-op inject cash from the sale of its insurance businesses and a flotation of the bank on the stock market.
LT2 is calling for a full debtor bail-in, where bondholders exchange their bonds for shares in the bank.
The group, which is using Moelis as its financial adviser and Shearman & Sterling as its lawyer, is understood to be largely made up of US hedge funds, including Aurelius Capital Management and Silver Point.
It is understood that the Prudential Regulation Authority, under Andrew Bailey, has been kept informed about LT2’s plans although it has not given it any formal approval.
Co-op Group chief executive Euan Sutherland has stated bluntly that there is “no plan B”, with resolution the only choice. A source close to LT2 said: “There are clearly workable alternatives but the Co-op will not engage. We want to talk to the bank’s board, particularly because it appears that the bank and the group’s best interests may not be aligned under their current proposal.”
Co-op Bank issued its recapitalisation plan in June, a month after its plan to buy 630 branches from Lloyds had collapsed. But publication of the prospectus for the debt exchanges is still not expected until the end of this month.
LT2’s decision to go public comes after a smaller group, including property company CLS and thought to own about £5 million worth of bonds, wrote to Co-op Bank chairman Richard Pym questioning the scale of £379 million of write-offs in the half year results.
A CLS spokesman said: “We have written to the bank and said that they need to work in a more engaged and constructive way with bondholders.”
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A third private shareholder group, which invested in Co-op bonds for income, is also calling for talks.
Co-op has said it will talk to bondholders only when the prospectus has been issued.
LT2 today pointed out that if bondholders agreed to its bail-in plan their £1.5 billion of bonds, if converted into shares in the bank, would exactly match the gap identified by the PRA. But it added that its members could be prepared to put up extra cash if that was deemed necessary.
Comment: No plan b — but plan a is hybrid
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The gaping hole between Euan Sutherland’s announcement of the Co-op’s rescue and the vote required to advance it has left ample time for mischief-making.
Simply saying there is no alternative to the former do-it-yourself man’s plan looks increasingly like it won’t do for faceless bondholders who have far less to lose than the Co-op.
Sutherland has pencilled in for December the unveiling of his new strategy. At this rate, he’ll be lucky to get there. And if he does, the Co-op will be a curious hybrid, half mutually owned, half stock-market listed. Some bankers think its model is redundant. Why not just sell the supermarket chain and funeral homes to cover the losses at the bank’s dodgy back book and try to fashion a merger of what is left with another lender?
All those “where are they now?” features five years on from the Lehman collapse should have been supplemented with a few “where were they then?” pieces. The regulators who approved the Co-op-Britannia deal can’t say they weren’t warned.