Hedge Fund Cock Up?
More news on the Co-op bank Recapitalisation Scheme today.
This morning’s Times carried this enigmatic piece on page 56:
“Co-operative Bank: Hedge funds planning to take control of the lender have been left with a potentially expensive loophole. At issue is £125 million of new capital that lower tier bondholders, led by the funds Aurelius Capital and Silver Point plan to inject.”
This afternoon the FT explains what has happened thus:
“A group representing the hedge funds and other lower tier two investors on Thursday pledged its support for the restructuring, after asking the Co-op to make a last-minute amendment to the terms.
The change is intended to close a loophole that was providing an opportunity for brokers and traders to undermine the new equity issuance by submitting claims for larger numbers of shares than they were entitled to. This could have meant that the LT2 group ended up with a smaller equity stake than they expected.
“The LT2 Group confirms its support for the recapitalisation of the Co-op Bank and . . . is fully supportive of the new management team for the bank,” it said”
The detail of the new announcement on the Co-op Group website reveals that the Bank may apply to court to modify the Scheme of Arrangement. Some of the holders of LT2 bonds have requested that and the Bank is considering whether or not to make the application. The statement says that no slippage in the timing of the deal beyond 31.12.13. would be permitted. That is a PRA deadline on the capital. The legal obligation of some of the holders of these securities to support the Scheme (the “lock in agreement”) would stay in place whether the Scheme is modified or not.
Here’s the change the announcement outlines. Under the existing Scheme as proposed these holders get:
“a combination of:
£100 million of 11 per cent. Subordinated Notes due 2023 to be issued by the Bank (“Bank T2 Notes”); and
112,500,000 new ordinary shares in the Bank (“New Ordinary Shares”) representing 45 per cent. of the total issued share capital of the Bank following completion of the LME.
The holders of the Dated Notes will also be entitled to subscribe for 62,500,000 additional new ordinary shares in the Bank (the “Additional New Ordinary Shares”) at a price of £2.00 per new ordinary share representing 25 per cent. of the total issued share capital of the Bank following completion of the LME, for an aggregate consideration equal to £125 million, pursuant to, and on the terms of, the Scheme with such subscription being underwritten by certain persons who were holders of Dated Notes as at 4 November 2013. The Scheme provides that any holder of Dated Notes is entitled to elect to subscribe for between a minimum election of 50,000 (for an aggregate subscription price of £100,000) and a maximum election of 62,500,000 Additional New Ordinary Shares.”
If the Co-op Bank made an application to court and the court agreed the modification they would get:
“a combination of:
£100 million of Bank T2 Notes; and
141,666,666 new ordinary shares in the Bank representing 56.67 per cent. of the total issued share capital of the Bank following completion of the LME.