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Co-op Bank rescue plan hits 7,000 retail investors

Cooperative-Co-operative-Bank-Branch-700x450.jpg

Around 7,000 small retail investors will be among those hit by The Co-operative Bank’s rescue plan to plug a £1.5bn capital shortfall, as it emerges Lloyds Banking Group knew the Co-op was in difficulty six months ago.

Under the rescue plan, bondholders, institutional investors and Co-op Bank’s parent company the Co-op Group will jointly contribute towards plugging the hole in the Co-op Bank’s balance sheet.

Bondholders, including those with perpetual subordinated bonds, invested in the Co-op expecting a coupon of between 5.5 per cent and 13 per cent a year. The rescue deal means bondholders will no longer receive these interest payments, and instead will be offered a combination of unsecured bonds issued by the Co-op Group and shares which will give them a “significant minority stake” in the bank.

The so-called “exchange offer” is likely to be launched in October. The bank is considering whether it can provide independent financial advice to affected retail investors, which the Co-op will pay for.

Yellowtail Financial Planning managing director Dennis Hall says: “This may end up being a better option for bondholders. People would not have expected this of the ethical Co-op, but it turns out it is as capitalist as the rest of them.”

The Co-op Bank pulled out of the deal to buy 632 Lloyds Banking Group branches in April, with ratings agency Moody’s downgrading the bank in May.

Lloyds chief executive Antonio Horta-Osorio told MPs this week LBG began to have doubts in December about whether the branch sale would go through, after it uncovered the capital shortfall.

He said Co-op told him it was “handling” the situation, but Lloyds was not “totally reassured.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. Esther Monchek 20th June 2013 at 9:24 pm

    A Co-op Bank bondholders’ Action Group is forming. Those interested in pressing for a better deal should complete the form at: https://docs.google.com/forms/d/18wc3Rg7_JwFIw18ZVrKymR_HHQqjru7o1tsca1hQMuE/viewform

  2. The true number of pensioners and retail investors affected is more like 15,000 and a huge number have contacted me asking me to start a campaign on their behalf which I have done at:

    http://www.fixedincomeinvestments.org.uk/fixed-interest-blog/troubleattheco-op

    The Co-op Group is acting in the most unethical way imaginable. It has complete ownership and governance of the Co-op Bank and would appear to have been playing fast and loose with the Bank’s money and having made a series of catastrophic decisions, and signed off inaccurate accounts for some years is seeking to make the Bank’s bond holders pay the bills while retaining majority ownership for itself. The Co-op Group clearly has the cash resources, facilities and assets to support the bank itself as it should if it were taking responsibility for its own failings. Alternatively, if it has lost the will, it should either seek to float the bank or hand it over to its bondholders rather than attempt to railroad them into this unethical attempt to upend the capital hierarchy cooked up by Allen & Overy once the true extent of the Group’s stewardship failings had been uncovered by the PRA.

    To make matters worse the Co-op Bank and Group now appears to be pursuing a strategy of disseminating false information to the press targeted at scaring vulnerable pensioners and retail holders of its bonds into selling and driving down prices. For example Telegraph has reported the following in 3 separate articles:

    Holders of £370m of permanent interest bearing shares (PIBS) issued by the Co-op and Britannia Building Society before its takeover are expected to have their coupons cancelled, making them effectively worthless.

    http://www.telegraph.co.uk/finance/newsbysector/banksandfina

    http://www.telegraph.co.uk/finance/newsbysector/banksandfina

    And the Express has reported the remarkably similar:

    Holders of £370m of permanent interest bearing shares (PIBS) issued by the Co-op and Britannia Building Society, and typically owned by pensioners, are expected to have their coupons cancelled – making them effectively worthless.

    http://www.express.co.uk/news/uk/408180/Co-op-s-1-5-billion-

    The TRUTH is that the £370 million is made up of 3 separate issues of preference shares and perpetual subordinated bonds (not PIBS) as follows:

    1. £60 million 9.25% Preference Shares (CPBB)

    The dividend on these MUST be paid (either in cash or 4/3 the amount in lieu in additional preference shares if the Bank has sufficient distributable reserves. The Bank had £1.3 billion of distributable in the last audited accounts and even today’s PRA review announcement comes nowhere near eliminating these.

    2. £110 million of 13% Perpetual Subordinated Bonds (CPBC) and £200 million of 5.5555% Perpetual Subordinated Bonds (CPBA)

    While the interest on these can be deferred in certain circumstances it CANNOT be cancelled unless the Bank is insolvent. If it is deferred it accumulates and must be paid before any dividend is paid on the Bank’s ordinary shares. It follows that if these bonds are ‘effectively worthless, as reported than both the Bank’s existing and proposed additional Ordinary Shares will never pay a dividend and are also worthless.

    If, as seems likely, the inaccurate press reports have been instigated by information from the Co-op Bank or Group then I think this constitutes ‘Market Abuse’ under the Financial Services & Markets Act 2000 as follows:

    Dissemination – giving out information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading.

    http://www.fca.org.uk/firms/markets/market-abuse

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