Money Co-op Group in stand-off over bank rescue

19:05  18 june  2017
19:05  18 june  2017 Source:   Sky News

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The Co - op Group is locked in a stand - off this weekend with a consortium of hedge funds about a £200m pensions deal that would pave the way for a rescue of the mutual's former banking arm.

Before a previous rescue deal in 2013, the Co - op Group had owned 100% of its banking arm. The Co - op Group has already written off the value of its 20% equity stake in the bank , but is said to be likely to retain a 'symbolic' holding if the bondholders can agree a recapitalisation.

The Co-op Bank's roots can be traced back to 1872 © Getty The Co-op Bank's roots can be traced back to 1872

The Co-op Group is locked in a stand-off this weekend with a consortium of hedge funds about a £200m pensions deal that would pave the way for a rescue of the mutual's former banking arm.

Sky News has learnt that talks involving the Co-operative Bank's bondholders have hit a major obstacle just days before they hoped to unveil a £700m recapitalisation of the struggling lender.

Sources said this weekend that the Co-op Group, which currently owns a 20% stake in the bank that carries its name, was demanding a more robust financial package to protect the 90,000 members of their joint retirement scheme.

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Before a previous rescue deal in 2013, the Co - op Group had owned 100% of its banking arm. The Co - op Group has already written off the value of its 20% equity stake in the bank , but is said to be likely to retain a 'symbolic' holding if the bondholders can agree a recapitalisation.

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A failure to resolve the deadlock would imperil the Co-op Bank's ability to survive on its own, raising the prospect of an orderly wind-down of its business overseen by the Bank of England.

Sources said that the bondholder group - which already controls most of the bank's shares - had offered to put in place a support package for pensioners worth well over £200m.

Of this, £62.5m would be paid into the pension scheme in cash over a period of five years, with the remainder comprising guarantees over certain bank assets if its future was again plunged into doubt.

A source close to the bondholders described it as "a good deal" for the pensioners.

However, the Co-op Group, which is one of the UK's biggest food retailers and funeral care providers, has objected to the proposal, arguing that it fails to adequately protect pension scheme members.

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So whether they like it or not, and subject to a difficult negotiation over what percentage of Co - op Bank 's new shares they get for writing off their loans to the bank , the subordinated debt holders may ultimately agree to the rescue .

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The mutual is said to be demanding that a cash sum closer to £300m is injected into the scheme in order to win its support for a split into separate Group and Bank schemes.

The bondholders want to terminate the Co-op Bank's existing "last man standing" arrangement which ensures that it would guarantee the joint pension scheme if the Co-op Group went bust, and vice versa.

However, the hedge funds are seeking a commitment from the Group that it will maintain its side of the "last man standing" deal.

Under the current agreement, the Group pays £20m into the scheme each year, with the Bank contributing £5m, reflecting their respective assets and liabilities.

A new triennial valuation of the scheme deficit is due to take place this year.

The exact position of the pension trustees was unclear on Saturday, and a spokesman for them declined to comment.

Without the Co-op Group's support for the revamp of the retirement scheme, the bondholders would be unable to force through a deal.

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Before a previous rescue deal in 2013, the Co - op Group had owned 100% of its banking arm. The Co - op Group has already written off the value of its 20% equity stake in the bank , but is said to be likely to retain a 'symbolic' holding if the bondholders can agree a recapitalisation.

The hedge funds are understood to have secured outline support from banking regulators for other aspects of their Co-op Bank rescue plan last week.

However, insiders said the splitting of the existing pension scheme into separate Group and Bank schemes was important to the hedge funds' investment case.

"At some point, they'll want to sell the Bank, and these new pension arrangements will make doing so much easier," an insider said on Thursday.

One regulatory source said the Co-op Group was determined not to be held to ransom, but did not want to be seen as standing in the way of a rescue of the bank.

Its stake in the lender would be slashed to less than 5%, under the bondholders' plan.

Prior to a previous rescue deal in 2013, the Co-op Group had owned 100% of its banking arm.

A continued impasse between the mutual and the bank's bondholders could reignite takeover interest from a consortium comprising Swiss and Qatari investment groups.

Interritus Limited, which is run by a German financier, and Al Faisal Holding have held several rounds of talks with the Co-op Bank's board and advisers, and have pledged to take a long-term approach to reviving its fortunes.

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The latest twist in the attempts by the Co - op to stave off nationalisation of the bank means that the group , formed by the Rochdale Pioneers in 1844, will be left with a 30% stake when the bank is floated on the stock market rather than the 75% it had originally hoped for when the rescue deal was first

Assets in the bad bank will be run off over time, while the plan is to invest in the good bank and return it to profitability. Under the terms of the rescue , the Co - op Group will offer them new bonds instead that will cut the value of their holding by more than half.

The scramble to rescue the Co-op Bank has been triggered by its need to find roughly £750m of new capital in the next few months to avoid being wound up by the Bank of England.

The US hedge funds - Blue Mountain Capital Management, Cyrus Capital Partners, GoldenTree Asset Management and Silver Point - are said to be willing to inject more than £240m of new equity into the lender.

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 for equity - a process known as a liability management exercise.

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

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

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.

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 Co-op Group and Co-op Bank declined to comment, while the bondholders could not be reached.

Britain's Co-op Bank agrees £700 million rescue package .
Britain's Co-operative Bank said on Wednesday it had agreed a £700 million pound ($897.5 million) financial rescue package with leading investors that will shore up its capital base, ending months of uncertainty about its future. Investors who own the bank's debt will pump £443 million pounds into recapitalising its bonds and will also help it raise £250 million pounds in fresh equity, the bank said in a statement.

Source: http://uk.pressfrom.com/news/money/-173459-co-op-group-in-stand-off-over-bank-rescue/

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