Co-op Bank’s future in the hands of its small investors

Co-op bondholders offered better terms in an effort to bring about rescue deal

Nearly 13,000 private investors, many of them pensioners, could hold the key to the future of the Co-operative Bank after it unveiled a revised rescue plan that won’t go ahead without their stamp of approval.

It is high-stakes stuff because if the proposed restructuring isn’t approved by enough of these people holding Co-op Bank bonds and preference shares, the bank is likely to fall under the control of the Bank of England, and/or it could be nationalised or wound down.

The hurdles that have to be jumped are high: there will be four separate votes of bondholders and preference shareholders, and the bank says that if any one of these doesn’t succeed, the rescue will fail.

Under the proposed package, the wider Co-operative Group will own just 30% of the bank; the rest will be owned by its bondholders. Those include a group of hedge funds, led by the US-based Silver Point and Aurelius.

The 12,800 or so retail investors hold “perpetual subordinated bonds” (known as Pibs) or preference shares, and this week, as part of the new proposals, they have been offered improved terms.

Many had bought the bonds to provide a secure retirement income – they offered annual interest ranging from 5.5% to 13% – and some had formed an action group to fight the original plans to offer them shares in the bank. They have now been offered an alternative that will still leave them out of pocket, but by much less than many originally feared.

Holders of the 13% bond will be offered a choice of continuing the 13% income a year until 2025, but losing all their underlying capital, or getting 9.2% a year until 2025 and 84% of their capital back. A similar deal is on offer to 9.25% preference shareholders, while investors with the 5.5% bonds will be offered a new bond paying 5.8% a year, but will lose nearly half of their underlying capital.

Bond expert Mark Taber of the Co-op Bank Retail Investors Campaign says the outcome is the best small investors could have hoped for. “This deal has been extremely hard-fought and is now a much better solution for retail holders and pensioners. It is now up to all holders to decide whether to accept. We now hope that our support of the offer will play its part in the future success of the bank under the innovative hybrid structure which enshrines co-operative values while providing sound governance and access to capital markets.”

The campaign was started in June in response to requests from hundreds of pensioners and retail investors who were concerned about the future of the bank, and the impact the proposed exchange of their bonds into equity would have on their income. The number of retail investors registered with the campaign quickly grew to around 2,500.

“The majority of these are pensioners in their 70s, 80s and 90s who acquired Co-op Bank bonds for pension income,” says Taber.

The challenge now will be getting all these people to vote and securing the necessary majorities. The bank is keen for people to get their vote in by 29 November at the latest. The deadline is 6 December, but the terms of the offer are more favourable if enough investors participate by the earlier date.

“We’ve got to get them through the gate. That’s the logistical operation that’s under way,” says Niall Booker, the bank’s chief executive.

The bosses warn that if the rescue fails, and the bank were to enter into a bank insolvency or administration procedure, “holders of relevant securities would receive no recovery at all”.

With all of this going on, it’s perhaps not surprising that the Co-op Bank has been losing out in the battle to attract customers switching current accounts. It said there had been a “material reduction” in the number of people moving their accounts to it since the seven-day switching service was introduced in September, but insisted it had not seen huge customer outflows.

The bank has also stated that the Co-op group’s ethics and values would be “legally embedded” in the bank’s constitution, and protected on an ongoing basis by an ethics committee of the board with an independent chairman.

These “articles of association” cannot be changed without the support of the Co-operative Group. If whoever was running the bank in future were to ditch the wording about ethics, they would no longer be entitled to use the Co-operative name.

Euan Sutherland, chief executive of the Co-operative Group, has refused to criticise the hedge funds, describing them as “very economically rational people” who were investing in the bank because they believed it could become profitable again. He said the bank had lost its way during the last few years.

However, at least 50 branches are to be shut and a “significant” number of jobs will go – though the bank had already embarked on a branch closure programme.

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