The Co-operative Group’s stake in the Co-op Bank could fall dramatically under a rescue plan being drawn up by hedge funds.
The UK’s largest mutual, which owns supermarkets and funeral homes, has a 20% stake in the bank, which put itself up for sale in February in a search for £750m of extra funding.
But under a proposal being discussed by the bank’s controlling hedge fund shareholders, this stake could drop towards zero unless the group decides to pump millions of pounds into the loss-making bank.
In April, the group wrote down the value of stake to zero, taking a £140m further hit on its shareholding that had stood at 100% before the problems at the banking arm were uncovered in 2013.
Four years ago, hedge funds which owned bonds issued by the Co-op bank helped contribute to its rescue and they are again regarded as the most likely source for the extra capital the bank needs to appease the Bank of England.
In an update on the sales process on Monday, the Co-op bank, which has 4 million customers, said it was “is in advanced discussions with a group of existing investors with a view to a prospective equity capital raise and liability management exercise”. A liability management exercise would involve bondholders agreeing to convert debt into shares.
In a previous update to the market, the bank had warned that it would need to undergo a liability management exercise regardless of whether it was sold, signalling that bondholders faced losses under all the options being considered.
In the latest announcement, the Co-op Bank said it was still continuing with talks about a sale of the business. It did not name its suitors – which at one time were thought to include Virgin Money – although earlier this month a Qatari conglomerate was said to be interested.
Al Faisal Holding, a Qatari conglomerate with interests ranging from hotels to transport, was cited as a bidder for the bank in a deal being coordinated by Interritus, an investment firm that owns a stake in Austrian bank Kommunalkredit.
The update also acknowledged the importance of ongoing talks to shore up the £10bn pension fund for both the group and the bank. Sky News has reported that the groups wants £200m to be put into the fund to allow it to be carved up between the two businesses.
The business secretary has the power to change the bank’s name if “it gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public” while the City regulator, the Financial Conduct Authority, has the power to prevent the use of the “co-operative” name to to protect consumers.