Co-Op Group Lenders 'Close To New Deal'

Lenders to the Co-Operative Group are demanding that its new management team slashes capital expenditure and provides greater protection for their loans in return for them supporting a sweeping financial restructuring.

Sky News understands that the syndicate of banks - led by the major UK high street institutions - is seeking a series of concessions from the Co-Op as its overall borrowings soar to more than £1.5bn as part of a rescue plan for the mutual's banking arm.

A steering committee formed by the Co-Op's lenders has apparently made substantive progress on a new agreement with the group since it announced in June that it would be required to fill a £1.5bn capital hole at the Co-Op Bank.

The bail-out plan will involve the Co-Op Group contributing £1bn to the bank through a combination of measures including the sale of its insurance assets, with bondholders suffering a further hit of about £500m on the value of their investments.

Under the proposals, the Co-Op Group's overall indebtedness is expected to increase from about £1.2bn at the half-year stage to well over £1.5bn, a level of debt which has triggered concerns among some of the lenders.

The Group's bank syndicate - which is led by Barclays (LSE: BARC.L - news) , HSBC (LSE: HSBA.L - news) , Lloyds Banking Group (LSE: LLOY.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) - is supportive of the new chief executive, Euan Sutherland, and his management team, but is understood to be keen to secure additional protection for its credit positions.

It also wants Mr Sutherland to shrink the Co-Op Group's capital expenditure plans in order to accelerate its return to a more normal level of indebtedness once the rescue of the bank is complete, one insider said on Friday.

The new chief executive is "aligned with" the thinking of the lenders and is satisfied with the progress of the talks, a person close to the Co-Op added.

In a statement issued to Sky News, a spokeswoman for the Co-Op Group said: “We remain in ongoing constructive dialogue with our syndicate of lenders and our detailed work on the wider Capital Action Plan remains on course.”

The rescue plan for the Co-Op Bank, which will involve shrinking its corporate lending activity and a significant number of job losses, requires the approval of bondholders. Further details of this so-called liability management exercise (LME) will not be disclosed to the lending syndicate until nearer the end of October, when it is also due to be announced to the stock market.

The Co-Op's new management team has angered bondholders by refusing to hold detailed talks with them about potential alternative rescue plans for the bank, with Richard Pennycook, its finance director, describing the current proposal as "the only game in town".

The mutual's banking arm reported a £709m half-year loss last month, with loan impairments, a failed IT system and compensation for product mis-selling all contributing to the carnage.

If investors do not back the restructuring plan, it would not remain a going concern and would fall into the clutches of taxpayers, the Group has warned.