Co-operative Bank has reached a £700m rescue package deal with its hedge fund investors.
The bank said the additional capital will enable it to “meet regulatory capital requirements in the medium term”.
The deal, with an “ad hoc committee of existing” bondholders, has been approved by the Prudential Regulation Authority.
Under the arrangement, Co-op Group’s shareholding in its namesake bank will fall from 20 per cent to around one per cent. The bank and the group have also agreed to separate their sections of the Co-operative Pension Scheme.
The hedge fund bondholders will effectively write off £443m that they were owed in a debt-for-equity swap to give them a 17 per cent stake. They will also help raise an additional £250m with a shares issue through a new holding company that will hold a 67.6 per cent stake in Co-op Bank.
Retail investors with bondholdings of £100,000 or less will receive 45 per cent of their original investment, with a cap of £13.5m.
Co-op Bank put itself up for sale in January, attracting attention from a number of lenders, including Virgin Money. However, interest dwindled and the Co-op Bank formally said it would not be sold earlier this week.
Co-op Bank chairman Dennis Holt said: “The board is pleased to confirm this proposal for a recapitalisation which will mean that the Co-operative Bank can continue as a viable stand-alone entity, with values and ethics at its heart. It is a great outcome for our customers.
“Our investors share our commitment to building our distinctive ethical franchise and see strong future growth potential for the Co-operative Bank.”
A spokesman for the ad hoc committee of bondholders said: “We have supported the turnaround of the Co-operative Bank since 2013 and this further investment will provide the bank with the capital needed to realise its potential as the UK’s leading ethical bank.”
The group is made up of Blue Mountain Capital Management, Cyrus Capital Partners, GoldenTree Asset Management and Silver Point.
A PRA spokesman said: “The PRA has accepted the Co-operative Bank’s plan to build greater financial resilience. Supervisors will remain closely engaged with the bank while the actions announced today are taken forward. Implementation is subject to certain regulatory approvals.”