The board of Co-operative Bank is meeting on Tuesday evening to finalise a £700m rescue package with hedge fund investors in a crucial deal to avoid the ethically focused lender being wound down by the Bank of England.
The lossmaking bank is set to announce as early as Wednesday morning that it has sealed an agreement with existing investors to wipe out junior bonds and issue vast amounts of new shares to boost its capital reserves, according to bankers briefed on the process. The expected deal comes five months after the bank warned it would fall short of the regulator’s requirements over the next few years.
It is the third rescue of an ailing European lender to be agreed in the past month, after regulators orchestrated deals for Spain’s Banco Popular and two lenders in Italy’s Veneto region to be restructured and sold to bigger rivals.
The Co-op Bank rescue involves five existing hedge fund investors, including Cyrus Capital Partners, GoldenTree Asset Management, Silver Point Capital and Blue Mountain, swapping some of their debt for equity in the bank in order to raise £450m.
The hedge funds will also inject about £250m of new equity.
The deal comes only four years after the beleaguered bank was salvaged by hedge funds after revealing a £1.5bn capital shortfall in 2013.
The latest rescue agreement saves the bank from being put into resolution by the BoE after confirming on Monday that it had failed to find a buyer.
Co-op Bank said this year that it would pursue a sale as its “preferred” route for buttressing capital reserves, alongside an alternative option of tapping existing hedge fund investors for more capital.
The bank received expressions of interest from various parties, from UK challenger banks to a Qatari company, which failed to materialise.
The Co-op Group’s stake, currently 20 per cent, is set to be slashed to only a few per cent under the plan, while the bondholders — who also own most of the equity — boost their holdings.
In addition to the £700m of capital, the investors are poised to inject about £60m into the pension scheme, which has been a contentious issue in the negotiations between the bank, the investors and the group.
The bank has some £800m of liabilities from the pension scheme of Britannia Building Society, which it acquired in 2009, plus a share of £8bn of liabilities from the Co-op Group’s scheme.
Talks have stalled over recent weeks as the bank and the group attempt to separate the pension scheme into two sections, so that the bank is not liable for the group scheme were the company to fail, or vice versa.
Several people briefed on the talks said an agreement had now been struck with trustees and the group whereby investors inject millions of pounds into the bank’s new pension scheme.
John Ralfe, an independent pension expert, said that a “big chunk of cash” was needed to go into the new bank section to ensure the lender’s members had the same level of protection as they have now.
The hedge funds are set to inject about £100m into the pension fund over the next decade, and will put up £200m as collateral as part of the scheme separation process, according to a person briefed on the process.
The bank had originally hoped to strike a deal by mid-June, in order to complete the debt-for-equity swap process before £400m of senior bonds mature in September.
Co-operative Bank, Co-operative Group and the investors declined to comment.