US hedge funds are set to take a collective controlling stake in the Co-operative Bank.
In an effort to fill a £1.5 billion capital hole, the Co-operative Group has given in to demands from the group of bondholders, including hedge funds Aurelius Capital and Silver Point Capital, to a restructure of the bank’s equity. The final details of the deal are expected to be announced on November 4th.
In August, Co-operative Group Chief Executive Euan Sutherland said "the options for the bank are very limited” and that there is “no Plan B",
The move marks the end of an era for the Co-operative Group, which has wholly-owned the bank since its inception and will now be left with a 30 per cent shareholding. Bondholders will own separate portions of the bank, with the Group holding the largest single share.
The concession comes on top of a half-yearly loss for the bank of £709 million, announced in August, and this week it also set aside £105m to cover further expected debts related to PPI claims and a miscalculation in the interest payments on some mortgages.
A statement from the Group said: “The Bank has made a re-assessment of certain likely future conduct costs and, as a result, the Bank expects to increase its overall provisions by approximately £100-105 million.
“The Bank’s estimates of existing provisions relating to customer redress have been revised, with these revisions relating primarily to a change in assumptions regarding the future costs of PPI redress, arrears charges and the processing of certain mortgage interest “first payments”.
“An additional provision has also been made in relation to the cost of customer redress that will be required following the identification of a technical breach of the Consumer Credit Act.”
As details of the bondholder distribution of shares emerged, Mr Sutherland confirmed in a video to members that the Group has “reached an agreement in principle that saves the Co-operative Bank”.
He said: “This is as a result of months of work and intensive discussions and negotiations with our key stakeholders and investors. We have been listening carefully. In reaching that agreement we have had three key priorities. Firstly to ensure that we didn’t turn to the taxpayer to bail out the bank and we haven’t. This is the first bank to be rescued and to survive as a standalone entity without taxpayer money.
“Secondly, that as a group, the co-operative retains effective control of the bank which I am delighted to say that we have, securing 30 per cent of the equity, which makes us the single largest shareholder.
“And that most importantly, we have to build a fair and attractive proposal for small investors, the hardworking families across Britain, that have invested in the Co-op Bank and I’m confident we have done this and will be able to announce the details of all these measures in the coming days.”
Mr Sutherland added that the bank will continue to be named the Co-operative Bank and that co-operative principles will be embedded in its constitution to guarantee this.