Co-Op Bank Said to Head for a Debt-for-Equity Swap

Co-Operative Bank Plc, the U.K. lender that put itself up for sale amid a capital shortfall, is coming closer to forcing bondholders to swap debt into equity and selling shares as it runs out of options to bolster its financial strength, according to people familiar with the matter.

The Manchester, England-based lender is seeking an agreement with bondholders including U.S. hedge funds Silver Point Capital and GoldenTree Asset Management within weeks to raise as much as 750 million pounds ($963 million), said the people who asked not to be identified because the details are private. Co-Op Bank is also in talks with a potential bidder for the company, though a so-called liability management exercise without a sale is the most likely option, the people added.

The bank has been attempting a turnaround since 2013, when regulators identified a capital shortfall, its parent company ceded control to bondholders and its former chairman resigned following drug allegations in a British newspaper. Failure to find a buyer or reach a deal to inject new capital could lead the Bank of England to place the lender into resolution, leading to steep losses for debt investors and a fire sale of its assets.

Chief Executive Officer Liam Coleman may seek a deal before the bank is required to pay about 26 million pounds in coupon payments due on June 20 and July 1 for two junior notes, said one of the people. The bank also has 400 million pounds of senior notes that mature in September, the people added.

Raise Less?

Co-Op Bank’s option to raise as much as 750 million pounds from a debt-for-equity swap and the sale of new shares is far from straightforward. A group of leading bondholders has submitted a proposal for less than that amount, according to people familiar with the matter. The bank may need investors to commit further funds or gain approval from the U.K.’s Prudential Regulation Authority to raise less money, they added.

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British lenders including CYBG Plc, the owner of the Clydesdale and Yorkshire Bank brands, and Richard Branson’s Virgin Money Holdings U.K. Plc have shown interest in the bank, people familiar with the matter have said. While Co-Op Bank has previously said it got “a number of non-binding proposals from strategic and financial parties,” it’s now only in talks with one bidder, two of the people said.

Buyers are concerned about integrating Co-Op Bank’s technology platform, although the heads of small U.K. lenders from OneSavings Bank Plc to Secure Trust Bank Plc have said they would consider purchasing assets if the lender was resolved by the BOE. That’s “one of the more likely conclusions that could arise,” according to Paragon Group Chief Executive Officer Nigel Terrington, who said he was eyeing a breakup earlier this month.

A so-called resolution of Co-Op Bank would be the first major test of the BOE’s powers to impose a restructuring and recapitalization under rules designed to end too-big-to-fail taxpayer bailouts. The bank has about 22 billion pounds of customer deposits, 19 billion pounds of loans, and 4 million customers.

BlueMountain Capital Management, Andrew Feldstein’s $22 billion investment firm, could invest, according to a person familiar with the matter. Ted Smith, an external spokesman for the New York-based fund, declined to immediately comment.

Alongside its U.S. hedge-fund owners led by Silver Point, the bank remains about 20 percent owned by its former parent, Co-Operative Group Ltd., the operator of businesses from funeral care to supermarkets. Co-Op Group has written down the value of its stake in the bank to zero from 185 million pounds a year ago.

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(Corrects amount of senior debt in fourth paragraph.)

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