The Co-operative Bank is to be floated on the stock exchange to help raise £1.5 billion of capital.
Following discussions with financial regulator, the Prudential Regulatory Authority, the Bank will receive a portion of the funds by converting bonds into shares in October, which will be floated on the stock exchange.
While the Co-operative Bank is already structured as a PLC, this move will not affect its mutually-owned status since the Co-operative Group will retain a majority share, according to a Group spokesman.
The Bank will raise £1bn this year and £500m in 2014 through the bail-in of bondholders and also through the disposal of the insurance business to ensure a capital shortfall of £1.5bn is found.
The sale of the life business has already been accepted by Royal London members for £219m. Moody's estimates the general insurance business, which was put up for sale last month, will fetch £276m.
Euan Sutherland, Chief Executive of the Group, said the announcement was “good news” since no further disposals of the society’s businesses were needed. He said: “We’ve been working very, very intensely over the last six weeks to get to this position of having a comprehensive planned solution going forward.
“The key element of this is it adds stability to our position. It adds stability to the bank, to our customers and all of our stakeholders. The next phase is the really detailed phase in working this plan through to create long-term, sustainable growth which plays to our strengths within the Co-op Group.”
Added Mr Sutherland: “The Group is confident that, under the Bank's strengthened management team, this plan offers the best way forward. We believe it is the right approach to ensure that we continue to provide great service for our 4.7 million Bank customers, while safeguarding the interest of other stakeholders.”
The details of the exchange are still being worked out, according to a statement issued by the Group. It said a minority of the bonds are held by retail investors whose average investment was around £1,000 and specific proposals will be drawn up for these investors.
Bondholders are planning to fight the Group’s planned debt restructure. According to the Financial Times, 800 small bondholders, the US hedge fund Aurelius and a committee of UK insurance company bondholders are set to separately ensure they each receive better terms with a swap of bonds into equity.
In a sector-wide initiative, the PRA indicated that by the end of 2013 major UK banks and building societies should hold capital equivalent to seven per cent of ‘risk weighted’ assets.
On June 20th, it clarified that the Co-operative Bank joined a list of other banks that had a collective shortfall of £27bn at the end of last year. The PRA’s ‘stress test’ revealed that the Royal Bank of Scotland (RBS), Lloyds Banking Group, Barclays, and fellow mutual Nationwide had to raise additional capital.
In a video message to customers, Mr Sutherland added that this was not “demutualisation”. He said: “Let's just remember that the bank has always been a PLC. And it always has had the ownership structure of our mutual organisation around that.
“That remains; we still have the majority stake in our bank and that provides us with the opportunity to lead our bank in an ethical, community-based, responsible way and that is a core part of our business plan going forward.”
Niall Booker, Chief Executive of the Bank, added: “We have a strong core retail business. While we recognise that the short-term outlook is challenging, the measures we are announcing mean we now have a credible plan for addressing the capital shortfall we face and can turn our attention to managing our non-core assets down and restructuring our core bank.
“In doing the latter, I will be working closely with the strong team of people within the Bank to ensure that we are focused on delivering a profitable business, driven by our commitment to core relationship banking and providing our loyal customers with fairly priced products and high-quality service.”