Friday this week 29th November 2013 is the first key date in the long and complex process of saving the Bank from insolvency proceedings by recapitalising and demutualising it. The others are 11th December 2013 , the day of the Class Meetings to approve it and 16th December 2013, the date of the court hearing to finally approve it.
This post looks at that process, the legal mechanisms used to implement it and the timetable.
The Story So Far
In May this blog examined the Co-op Bank’s credit rating downgrade. That was the first public sign of the trouble to come.
In June, I looked at Plan A for a rescue of the Bank in the light of the £1.5bn shortfall identified by the PRA.
In September, hints of the likely demutualisation and indications of the Hedge funds’ demand for 100% ownership were addressed.
On 23rd October the scale of investor control was announced and later that month I shared my thoughts on the issue of the use of the name “co-operative” in that bank after it becomes 70% owned by stock market investors with follow up on Co-operatives UK’s response.
The Plan in Summary: A Reminder
The Co-operative Group will give 70% of the equity shares in the Bank to the senior bondholder (i.e. those with the highest priority claim – upper tier 2) in exchange for about £940m of the debt they hold plus a £125m cash injection into the bank. The Group will continue to hold the remaining 30% in return for providing £462m in a new Group bond and cash.
The lower ranked bondholders who are mainly retail investors on a smaller scale but who would have lost their whole investment if existing priorities of debt had been followed, will be offered new bonds with a choice between continuing their existing annual payments for 12 years with no capital sum or a lower annual payment plus a future capital sum. (See the FT Outline and Q & A)
The Legal Mechanisms Involved
Since this is a Law Blog, it might be useful to look at the legal basis and process for this crucial first stage of the recapitalisation plan for the Co-operative Bank PLC.
The detailed plans for the scheme can be found in a combination of the outline press release announcement and the detailed “nitty gritty” of the legal mechanism.
Why the Money is Needed:
Readers will remember that £1.5bn extra “common tier 1 Equity” is required by the bank as a result of the wide range of problems it has faced and the increased requirements imposed by the PRA and Bank of England for bank capital. The problems included the bad debt that Britannia brought, the bank’s excessive cost to income ratio, the money written off on IT schemes, and the compensation it is having to pay as a result of mis-selling PPI to its customers.
As the Summary section of the Bank Prospectus succinctly puts it:
“Para B.4b The capital shortfall is a result of continuing losses incurred by the Bank predominantly driven by impairment charges to the carrying value of the Bank’s loans, in particular corporate loans acquired as part of the merger with Britannia Building Society (Britannia) in 2009. Impairment charges for the six months ended 30 June 2013 were £496.0 million.
The Bank also has a high cost base relative to its revenue when compared with its peers. The Bank has an ageing IT platform that has suffered from under-investment in recent years and has failed to integrate Britannia into the Bank’s operations, resulting in significant cost duplications in front, middle and back office functions and a significant overlap in the branch network. In addition, the Bank’s revenues are impacted by it not having achieved sufficient penetration of its current account customer base and historically pricing certain of its products on terms more generous to customers than the market.”
– Page 8.
The recapitalisation plan will raise the £1.5bn in two ways:
A Liability Management Exercise in 2013 will contribute £1062m and
Another £333m – £170m by 30.06.2014 and another £163m by 31.12.2014 – will come from the Banking Group, the subsidiary of the Co-operative Group through which the Bank is held.
They are linked and conditional on each other but let’s look at the Liability management Exercise today. The rest of the money only comes if that goes ahead and that question depends on alegal process. Let’s look at that.
The Liability Management Exercise: The Current Process
As the FT Outline and Q & A reported, the two main groups of securities (bonds or shares in the Bank) affected are:
5.555% perpetual subordinated bondholders – lower tier 2 (LT2) investors – hand over their £937m of debt plus £125m of new cash plus £38m of interest (£1100m in total) for 70% of the Bank’s ordinary shares. This Group includes the Hedge Funds and holders of 48% of these securities have signed up to a legal commitment to vote in favour of the Scheme in their meeting. So those votes are in the bag.
9.25% Preference Shares and 13% perpetual subordinated bonds – both mainly held by retail investors and lower in priority for payment than the other bonds. They would have been completely wiped out in the normal course of events but are offered £38m for their £60m. They can swap for either “Instalment Repayment Notes” which get 12 years of income with no capital at the end or “Final Repayment Notes” which give capital at the end of the 12 years but less income from interest in the meantime. If 75% of each of the two groups agree to swap by 29.11.13, they all get more than if that doesn’t happen. Their agreement to swap is taken as a vote for the Scheme. However, the whole scheme has to be agreed before anyone gets anything. If the financial incentive works, it will be known on 29.11.13 whether one or both of these groups have effectively voted in favour of the whole plan.