Bondholders open talks with regulator over Co-op Bank rescue deal

A quartet of American hedge funds which will determine the future of the Co-op Bank has opened talks with City watchdogs about the terms of a rescue deal for the struggling lender.

Sky News has learnt that a committee of bondholders in the Co-op Bank and its advisers met officials from the Prudential Regulation Authority (PRA) last week to discuss the level of new capital required to secure a financial restructuring.

Sources said the hedge funds – Blue Mountain Capital Management, Cyrus Capital Partners, GoldenTree Asset Management and Silver Point – had used the meeting with the PRA to argue that the Co-op Bank needs a lower sum than the company has previously indicated.

The talks represent the opening stage of a dialogue between the bank, its bondholders – which also own the Co-op Bank’s shares – and regulators, with the process expected to take several weeks to conclude.

It emerged earlier this month that the hedge funds had tabled a proposal to the Co-op Bank that would involve pumping substantial sums into it.

Details of their proposal remain unclear, although it would involve the provision of a smaller sum than the £300m of new equity that the Co-op Bank had previously signalled it would require.

In March, the Co-op Bank said it would require between £700m and £750m of new top-quality capital, the majority of which would be generated by exchanging some of its debt securities for equity.

The remainder – between £250m and £300m – would come from issuing new shares.

There is no formal deadline for a rescue deal to be stitched together, and people close to the Co-op Bank pointed out that it continued to meet key regulatory capital and liquidity requirements.

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The hedge funds are likely to dictate the future of the lender following the failure to find a buyer for the Co-op Bank through a conventional sale process.

Sky News revealed last week that Virgin Money had walked away from a potential takeover, removing the most likely acquirer from discussions about its future.

The Co-op Group recently wrote off the remaining value of its 20% shareholding in the Co-op Bank – incurring a £140m hit which plunged the supermarkets-to-insurance mutual to a statutory annual loss.

The Co-op Bank has been hit by a string of legacy issues, as well as the challenge posed by ultra-low interest rates, since its £1.5bn bailout in 2013.

The Co-op Bank’s huge pension liabilities, and their joint ‘ownership’ with the Co-op Group, remain among the major obstacles to a deal to resolve its future.

The lender announced an annual loss this year of £477m, taking its total losses since its rescue in 2013 to well over £2.5bn.

If new capital is not forthcoming, regulators would have little choice but to put the Co-op Bank into a resolution process, which would involve an orderly wind-down of the company’s operations.

At that point, the likes of Nationwide or Virgin Money could be asked to step forward to take on some or all of the Co-op Bank’s four million customers.

A number of other parties, including OneSavings Bank and Santander UK, are more interested in acquiring individual loan portfolios from the Co-op Bank.

The Co-op Bank’s balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.

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Its former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs.

The bondholders and the PRA declined to comment.