Co-op Bank unveils rescue deal to plug £1.5bn hole

From BBC News:

Concerns about Co-op Bank's capital arose after a deal with Lloyds collapsed
Concerns about Co-op Bank’s capital arose after a deal with Lloyds collapsed

The Co-operative Bank has unveiled a rescue plan to tackle the £1.5bn hole in its balance sheet.

Most of the capital to be used to plug the hole will come through a “bail in” – a process where bond holders will be offered shares in the bank.

The deal will result in a stock market listing for the group.

The bank said the plan meant both investors and the group would make “a joint contribution” to the bank’s recapitalisation.

“This is the best solution for all concerned,” bank chief executive Euan Sutherland told BBC Radio 4’s Today programme.

The plan does not involve any help from taxpayers, but will mean bond holders will lose out in the short term.

However, the bank says that through exchanging their bonds for shares they will gain a “significant minority stake” in the bank, which will allow them to “share in the upside of the transformation of the bank”.

The shares will subsequently be listed on the London Stock Exchange.

However, Mr Sutherland denied this meant the Co-op Bank had changed its ethos.

“We have always been a PLC wholly owned by the Co-operative Group. The majority of the bank will still be owned by the Co-operative Group. There will be no change to our ethos or the way we run our bank,” he told the BBC.

The Co-operative Group – the Co-op Bank’s parent – is also providing extra capital.

The Co-op said it had agreed the plan “in full” with the City’s new regulator, the Prudential Regulation Authority.

Regulator test

In April, the Co-op Bank cancelled a plan to buy 631 bank branches from Lloyds Banking Group.

That was followed two weeks later by the ratings agency Moody’s downgrading the bank’s debt to junk status.

At the time, the agency warned the bank may need “external support” if it could not strengthen its balance sheet.

Most of Co-op Bank’s problems stem from bad loans associated with its takeover of Britannia Building Society in 2009.

The agreement with Co-op is the first test of the new City regulator, the Prudential Regulation Authority, since it assumed responsibility from the Financial Services Authority in April for regulating the banks. Part of its mandate is to ensure that the banks won’t have to be bailed out from taxpayer money again.

The Co-operative Group, parent of Co-op Bank, was founded in 1863. It has more than six million members and employs more than 100,000 people.

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