The Co-operative Bank is no longer for sale, with institutional bondholders agreeing to transfer their debt into equity. They have also agreed to provide additional funds to meet regulatory capital requirements. The Co-operative Group’s 20% stake – already written-off as of nil value – will fall to just 1%. The Bank retains the right to the brand name, despite ceasing to be in any sense a co-operative enterprise.
Through this latest deal, £700m of additional tier one capital will be reported by the Bank. This comprises £250m of new equity, plus around £443m of recapitalisation through institutions’ bonds being converted to shares. Smaller investors – those holding less than £100,000 each – will be given cash at a rate of 45 pence per £1 held in bonds. The arrangement has been approved by the Prudential Regulation Authority.
A sticking point hampering negotiations for several months was the treatment of pension liabilities. Until now the Group and the Bank had a shared pension scheme. The Bank’s pension liabilities – which increased significantly through the takeover of Britannia Building Society – are to be separated from those of the Group.
Pension scheme trustees, the Group and the Bank have now agreed how to split the pension fund’s assets and liabilities, with separate pension schemes being established for the Group and Bank. Around 21% of the existing joint scheme’s assets and liabilities will go to the Bank’s pension scheme.
This arrangement leaves the Bank’s pension scheme in deficit. To address this, the Bank will contribute £100m over the next 10 years. The Bank will provide this through annual payments of £12.5m per year for five years and £7.5m for the following five years. It will also provide upfront collateral for the pension scheme of £216m at the point of separation for the two schemes.
My understanding is that this arrangement does not have any negative implication for the Group’s balance sheet. However, if the Bank’s pension scheme performs badly, there could be a subsequent call on the Group for additional contributions.
In a statement, the Group said the deal provided assurance for the Bank’s long term future, including “agreement on the future structure of the shared Co-operative Pension Scheme … [this] provides security for scheme members”.
The Bank’s stated commitment to ethical values is unaffected by its separation from the Group. Bank chairman 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.”
Liam Coleman, the Bank’s chief executive, was quoted by the Financial Times as saying: “Our ambition is to return the Bank to full capital strength and safeguard our ethical franchise.”
Institutional investors have formed themselves into an ‘ad hoc committee’, or AHC. A representative of these investors said: “We have supported the turnaround of the Co-operative Bank since 2013 and this further investment will provide the Bank with the capital needed to realise its potential as the UK’s leading ethical bank.”
Those institutional investors are led by hedge funds – Silver Point Capital, GoldenTree Asset Management, Anchorage Capital Group, Blue Mountain Capital Management and Cyrus Capital.
These have had to decide whether to invest more in the hope of recouping previous losses, or else to give up the Bank as a mistaken investment. They will have been given hope by the Bank’s retention of the vast majority of its customers despite its problems – in recent weeks Triodos Bank launched a competing ‘ethical current account’ in the explicit hope of luring away customers from the Co-op Bank.