Co-op trustees demand clarity over funds' Bank pension plans

The guardians of the Co-op Group's £10bn retirement scheme have demanded fresh details of a plan hatched by US hedge funds to rescue the mutual's former banking arm.

Sky News has learnt that the pension trustees to the scheme - known as Pace (LSE: 4031.L - news) - have so far withheld their backing for a series of proposals tabled by the Co-op Bank bondholders, who also control most of the struggling lender's shares.

Talks resumed on Monday between the trustees, hedge funds, the Bank and the Co-op Group, which is at loggerheads with the bondholders over a plot to provide a financial package worth more than £200m to 90,000 Co-op pensioners.

The stand-off is threatening the hedge funds' ability to finalise a rescue deal aimed at securing the Co-op Bank's future.

A source close to the situation said the trustees had written to the bondholders in the last few days to seek clarity about a series of guarantees over Co-op Bank assets that would crystallise if the lender became imperilled in future.

Without the consent of both the trustees and the Co-op Group, a deal will be virtually impossible to push through.

Sky News revealed at the weekend that the Co-op Group, which currently owns a 20% stake in the bank that carries its name, wants a cash sum of more than £250m to be injected into Pace in order to win its support for a split into separate Group and Bank schemes.‎

Instead, the bondholder group has proposed paying in £62.5m in cash over a five-year period, with the remainder comprising bank assets, the nature of which was unclear on Monday.

In a statement issued on Monday, the Co-op Bank confirmed a series of Sky News reports that the investor talks were at an advanced stage and that discussions over the pension restructuring were continuing.

The Co-op Group, which is one of the UK's biggest food retailers and funeral care providers, has participated in previous Bank capital-raisings but is unwilling to commit any more funds to the lender, believing that doing so would fail its millions of members.

‎One regulatory source said the Co-op Group was determined not to be held to ransom, but did not want to be seen as standing in the way of a rescue of the bank.

Its stake in the lender would be slashed to less than 5% under the bondholders' plan.

The impasse between the various parties is complicated by the fact that the Group's relationship agreement with the Bank also needs to successfully renegotiated in order to rescue the lender.

The bondholders are seeking to terminate the Co-op Bank's existing "last man standing" arrangement which ensures that it would guarantee the joint pension scheme if the Co-op Group went bust, and vice versa.

However, the hedge funds are seeking a commitment from the Group that it will maintain its side of the "last man standing" deal.

Under the current agreement, the Group pays £20m into the scheme each year, with the Bank contributing £5m, reflecting their respective assets and liabilities.

A new triennial valuation of the scheme deficit is due to take place this year.

The hedge funds are understood to have secured outline support from banking regulators for other aspects of their Co-op Bank rescue plan last week.

Without an agreement to recapitalise the lender, it would face a winding-up process known as resolution, overseen by the Bank of England.

There remains a semblance of takeover interest from a consortium comprising Swiss and Qatari investment groups, although the prospects of a bid succeeding are remote.

The scramble to rescue the Co-op Bank has been triggered by its need to find more than £700m of new capital in the next few months.

The US hedge funds - Blue Mountain Capital Management, Cyrus Capital Partners, GoldenTree Asset Management and Silver Point - are said to be willing to inject more than £240m of new equity into the lender.

In March, the Co-op Bank said it would require between £700m and £750m of new top quality capital, the majority of which would be generated by exchanging some of its debt for equity - a process known as a liability management exercise.

The remainder - between £250m and £300m - would come from issuing new shares.

The Co-op Bank has been hit by a string of legacy issues, as well as the challenge posed by ultra-low interest rates, since its £1.5bn bailout in 2013.

The lender announced an annual loss this year of £477m, taking its total losses since its rescue in 2013 to well over £2.5bn.

The Co-op Bank's balance sheet ballooned following a disastrous merger with the Britannia Building Society, and then ran into trouble when it tried to buy more than 600 branches from Lloyds Banking Group.

Its former chairman, Paul Flowers, brought it into disrepute when his drug-taking and sexual proclivities were exposed by a tabloid newspaper, while his financial competence was questioned by MPs (BSE: MPSLTD.BO - news) .

The Co-op Group, Co-op Bank, pension trustees and bondholders all declined to comment.