US hedge funds pick advisers as Co-op Bank showdown looms

A pack of American hedge funds which rescued the Co-operative Bank from collapse four years ago have picked advisers to steer them through crunch talks that could lead to the struggling lender being wound up.

Sky News has learnt that a group led by GoldenTree Asset Management and Silver Point are close to hiring PJT Partners (Frankfurt: 1PJ.F - news) to help protect their financial interests during a looming restructuring.

Promontory Financial, a consultancy firm, is also expected to be brought on board by the funds to advise on the regulatory process that will help to determine the Co-op Bank's fate, according to insiders.

The appointments come midway through a sale process for the Co-op Bank which has drawn interest from Virgin Money, but which many observers expect to result in an orderly 'resolution' process led by the Bank of England.

Sources said the hedge funds were likely to have sought approval from the Takeover Panel to negotiate collectively because of the size of their shareholding in the Co-op Bank.

GoldenTree and Silver Point, which own substantial equity stakes in the lender, are likely to be asked to inject further capital through a new debt-raising exercise.

It is unclear at this stage whether they will be prepared to do so.

Earlier this month, the Co-op Group wrote off the remaining value of its 20% shareholding in the Co-op Bank - incurring a £140m hit which plunged the supermarkets-to-insurance mutual to a statutory annual loss.

Following an initial bid deadline earlier this month, the Co-op Bank issued a statement saying that it had received "a number of non-binding proposals" relating to its future.

It added that it continued to hold talks with "existing and other potential new investors on options to build capital".

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.

Further equity has been raised since then.

The Bank of England and the Prudential Regulation Authority are taking a close interest in the sale process, with the former having engaged Deutsche Bank (IOB: 0H7D.IL - news) to advise it.

The Co-op Bank's huge pension liabilities are among the major obstacles to a sale.

Senior Co-op Bank bonds have been trading at little more than 80p in the pound in recent weeks, underlining investors' pessimism that a £400m debt repayment due in September will be made.

Junior bonds have been trading at much more depressed valuations.

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

If new capital is not forthcoming, regulators would have little choice but to put the Co-op Bank into a resolution process, which would involve an orderly wind-down of the company's operations.

At that point, the likes of Nationwide could be asked to step forward to take on some or all of the Co-op Bank's four million customers.

A number of other parties, including OneSavings Bank (Stuttgart: 2OS.SG - news) and Santander UK (LSE: 44RS.L - news) , are said to be more interested in acquiring individual loan portfolios from the Co-op Bank.

PricewaterhouseCoopers (PwC) was drafted in last year to help the Co-op Bank find buyers for a £350m portfolio of commercial real estate loans, although that process is said to have been put on hold.

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.

The Co-op Bank's 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) .

GoldenTree, Silver Point and PJT were all unavailable for comment.