Co-op Bank set to launch debt-for-equity swap in search for capital

The Co-operative Bank is aiming to strike a deal within two weeks that shores up its balance sheet amid mounting concern that large depositors, including charities and mutual groups, face large losses if it is wound up.

The beleaguered bank is hoping to launch a debt-for-equity swap — where some investors swap their bonds for shares at a loss — within a fortnight, in order to complete the process before £400m of senior bonds mature in September, according to two bankers briefed on the process.

The Co-op Bank announced in January that it must raise more capital after revealing that it is set to fall short of the regulatory threshold for reserves over the next few years.

The bank is planning to raise about £450m from the debt-for-equity swap. But it must also raise about £300m in new equity.

Bankers close to the plans cite four companies — Cyrus Capital Partners, GoldenTree Asset Management, Silver Point Capital, and Blue Mountain — as the most likely of the existing tier-two bondholders to pump in more capital. The four companies declined to comment.

However, should the bank not strike a deal to raise £300m, it could ultimately lead to an orderly wind-down of the bank in a crucial test of the Bank of England’s resolution powers.

But this would leave customers exposed to losses if they hold more than £85,000 on deposit — the limit for protection from the Financial Services Compensation Scheme.

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A number of charities, mutuals and other co-operative groups have chosen to bank with the lender to satisfy their ethical approach to finance.

The Co-op Bank has, since 1992, employed an ethical policy on whom it will finance, which has uniquely positioned the lender as one of the few to meet the requirements of charities, social enterprises and other similar companies.

Bankers close to the Co-op Bank maintain that it is still pursuing a sales process at the same time, with at least one party understood to be interested.

However, the Co-op Bank has not yet been able to find a buyer for the whole company, despite initial expressions of interest.

Experts point out that a hurdle hindering the chances of a sale is the bank’s pension liabilities and its joint involvement with the Co-operative Group’s scheme.

John Ralfe, an independent pension consultant, said: “The modest value of the Co-op Bank’s operating business is completely swamped by its huge pension liabilities — £800m from the Britannia scheme, plus a share of the £8bn Co-op Group scheme. No potential purchaser will be prepared to buy the bank as a whole”.

The Co-op Bank declined to comment.

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