Co-op Bank and Co-op Group to end relationship after £700m rescue deal

There had been fears the Co-op Bank might collapse - PA Wire/PA Images

Co-operative Bank will cut its historic ties with the Co-operative Group and impose heavy losses on retail bondholders as part of a £700m rescue deal with its US hedge fund owners to avert a collapse.

The Co-op Group’s stake in the loss-making lender will drop from 20pc to about 1pc and, while the bank will keep its branding and name, its so-called 'relationship agreement' with the mutual will finish.

That agreement was struck in 2013 when the hedge funds first bailed-out the lender following the discovery of a £1.5bn black hole in its finances. It sees the bank’s services promoted to the mutual’s members.

The Group, whose core business is in supermarkets, funerals and insurance, said the agreement will now “naturally fall away and come to a formal end in 2020”, a pivotal moment in the history of bank that was set-up 145 years ago as the loans and deposits division of what was then the Co-operative Wholesale Society.

Five hedge funds - Anchorage Capital Group, Blue Mountain Capital Management, Cyrus Capital, GoldenTree Asset Management and Silver Point Capital - have orchestrated the rescue. Aside from Anchorage, the other four funds all participated in the 2013 bail-out that cut the Group’s 100pc ownership to 20pc.

This latest plan, which will be voted on by all the lender's investors, will see £250m of new equity injected into the  bank and at least £443m raised from a debt-for-equity swap, helping to shore up its capital position.

It will deal a blow to retail investors, who will receive cash from the deal. Those holding less than £100,000 in bonds will only get back 45p in the pound of their initial investment, with the total payout capped at £13.5m.

However, institutional investors will suffer even heavier losses and will receive roughly 15p in the pound in shares, although they will increase their equity stakes in the bank.

Dennis Holt, the lender's chairman, said the terms for retail bondholders were “intended to be appropriate to a more vulnerable group who may not be as sophisticated as some of the other investors”.

The rescue ends the relationship agreement between Co-op Group and the bank

While the Government and the Financial Conduct Authority can revoke the “co-operative” name if its use is not appropriate, Mr Holt said the bank will continue to abide by co-operative values and ethics despite its hedge fund ownership.

He also insisted the hedge funds were not planning a stock market float or sale of the business in the future, to cash out and generate a return on their latest investment.

“Our investors recognise that this is a long term commitment so there is no gun held to our head,” the chairman said.

As part of the rescue, a deal has been struck with the trustees of the £10bn Co-op Group pension scheme to split the retirement plan into two legally separate parts in 2018.

Some 21pc of the assets and liabilities of the scheme will be allocated to the bank's retirement plan.

While the lender, led by chief executive Liam Coleman, will cease to be liable for the bigger section that will remain with the Group, the mutual will still be liable for the bank’s scheme. The bank’s investors will also pump £100m into the lender’s scheme as well as putting up £216m in initial collateral.

Co-op Bank is yet to recover from its disastrous takeover of building society Britannia in 2009, which saddled it with bad debts.

It lost £477m in 2016, its fifth consecutive year in the red, and put itself up for sale in February as its finances deteriorated. That led to fears the Bank of England’s Prudential Regulation Authority (PRA) would be forced to step and wind the business-up.

A sale was abandoned earlier this week in favour of a hedge fund rescue.

A PRA spokesman said it “accepted” the lender’s plan and that “supervisors will remain closely engaged with the bank”.

Still, question marks remain over when the lender will return to profit.

Simon Adamson, an analyst at CreditSights, said: “We remain unconvinced about the longer-term viability of Co-op Bank as an independent institution, but this recapitalisation should enable it to meet regulatory capital requirements in the short to medium term”.