The Co-operative Bank has agreed on a £700m rescue package, which will see investors swap their debt for a stake in the bank.
The debt-for-equity swap with hedge funds means the Bank can continue as a standalone entity but will cut the Co-op Group’s stake in the Bank from 20% to about 1%.
The Group was formerly the sole owner of the Bank but has seen its stake cut after several rescue operations following the crisis of 2013, when a £1.5bn hole was discovered in the Bank’s finances.
Now, the Group says its relationship agreement with the Bank, “which covers, among other things, the promotion of Bank services to members of Group, will naturally fall away and come to a formal end in 2020”. The Group’s right to nominate a director to the Bank board will end immediately on completion of the deal. The Bank will also separate its pension fund from the Group’s scheme.
The Bank confirmed that its name, brand and commitment to co-operative values, set out in its Ethical Policy, will continue unaffected.
Accepting the plan, the Bank of England’s Prudential Regulation Authority said: “Supervisors will remain closely engaged with the Bank while the actions announced today are taken forward. Implementation is subject to certain regulatory approvals.”
Further details of the proposal are expected to be made available in mid-July.
Bank chair Dennis Holt said: “The board is pleased to confirm this proposal for a recapitalisation which will mean that the Co-operative Bank can continue as a viable stand-alone entity, with values and ethics at its heart.
“It is a great outcome for our customers. Our investors share our commitment to building our distinctive ethical franchise and see strong future growth potential for the Co-operative Bank.”
The Co-op Group said it “welcomes the announcement from the bank on the terms of the capital raising plan to secure the Bank’s long term future which includes agreement on the future structure of the shared Co-operative Pension Scheme and provides security for scheme members”.
It added: “Throughout the multi-party process to find a capital solution for the Bank, the Group has worked hard to provide certainty for and protection of the interests of its members, colleagues, investors and the members of the shared pension scheme (Pace).
“The Group confirms that it and the Bank have agreed principles with the Pace Trustees to separate the respective sections of the scheme and to remove the Bank’s obligation to support the Group’s Pace scheme liabilities. The Group and the Trustees have also negotiated with the Bank a recovery plan for the Bank section of the Pace scheme which will see the Bank contribute £100m over 10 years and provide initial collateral of £216m from the point of sectionalisation.
“The Group confirms that it is supportive of the plan and intends to vote in favour of the capital raising.”