Co-op Bank: Playing Poker on a Slippery Slope?

Next month, the Co-op Bank and Co-op Group will announce details of the rescue plan announced back in June 2013 . Essentially the idea is to increase the Bank’s capital by extra Co-op Group investment in bank shares and a “haircut” for various bond holders  who would get varying amounts of shares worth less than their bonds. Maybe the Bank would give up 25% of its ownership stake?

However,  US “vulture funds”  have bought up significant numbers of bonds and are now trying to start negotiations with the Co-op Group to increase the value they will get from any deal to raise capital.

They have done that by suggesting a “Plan B” under which the whole ownership of the Co-op Bank would be held by stock market investors. They have said, however, that what they want is negotiations. Presumably the aim is to increase the return holders of the bonds will get. Their aim will be to threaten that they can gather enough support to block the Co-op’s own plan so as to increase the value those bondholders get.

This Financial Times Blog Post indicates how high up the agenda demutualisation is. You may wish to register with the FT to be able to read it for free.

We must hope the Co-op Group and Co-op Bank Board and Executives are well advised and skilled at poker. Only if they are, is the Movement likely to keep any meaningful degree of control of the Bank on an ongoing basis after any deal is done.

Seventy five percent (75%) of the ordinary shares allows the Co-op group to amend the articles of the Co-op Bank. If investors have more than 25% they can block that. The lower the Group’s stake under 75% the more they depend on the agreement of other shareholders to get anything through. Any one minority investor with a substantial minority stake will be able to cause problems. Five percent allows you to influence meeting agendas and 10% allows you to call a Bank general meeting. The minority will have to be kept sweet. Stock market rules require shareholder votes for many decisions and a high level of public disclosure. A brave new world for the Co-op……

The bank is also more likely to be seen as “in play” for a takeover in those circumstances and, from the point of view of bank executives, once any shares are listed, issuing more to raise capital will always be tempting.

How steep is the slippery slope here?