Co-op Bank secures £700m rescue package from Hedge Funds
The Co-op Bank has secured a capital injection totalling £700m to avoid being wound down by the Bank of England after it failed to find a buyer following its February announcement that it was up for sale. The bank, which has reported losses for five consecutive years, totalling over £2.5bn, will raise £250m of new equity from its existing investors along with a further £450m that will be sought from the conversion of existing debt into equity.
Existing investors with less than £100,000 of bonds will receive only 45% of their original investment back in cash in a total payout limited to £13.5m. Institutional investors will be required to convert £426m of bonds into equity. This will result in a 17% post-restructuring equity holding in the bank. The £250m of equity will be raised from existing hedge fund investors (including Cyrus Capital Partners, GoldenTree Asset Management, Silver Point Capital and Blue Mountain), and will be provided through a holding company recently established. This holding company will own 68% of the bank post-restructuring. The Co-op group equity stake will fall from 20% to around only 1%.
The bank has long been a favourite with its four million customers due to its unique ethical policy. This ethical policy restricts the bank on whom it can lend and has long been aligned to the needs of the charitable space. Dennis Holt, chairman of the Co-op Bank, stated that the existing ethical policy would prevail noting “the co-operative is all about behaviour. It’s about values. It’s about ethics and that is embedded in the bank and the owners are totally committed to that”.
Bondholders will be able to vote on the restructuring and the proposals will require at least a 75% approval. Invesco Asset Management, a major bondholder, is expected to support the proposal according to various sources.
Commentary
This rescue package provides some comfort for the bank’s four million loyal customers who have continued to offer their support despite the heavy losses and many scandals they have borne witness to over the last five years. The Bank of England's Prudential Regulation Authority has indicated that it has accepted the proposal, supporting the bank moving back towards a stable footing.
The bank’s commitment to remain true to the unique ethical values on which it was founded should help to reassure the many social enterprises and charities customers that have deposited funds with the bank. While the above rescue package provides comfort, approval is still required and we will keep you informed once this has been sought. During this time period, it would be wise to remain close to the depositor compensation limits.
Should you wish to discuss any of this in more depth and how this may affect your cash holdings, then do give us a call and we’ll be happy to assist.