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.”