Co-op Bank today tied up a £700m rescue package deal with a group of US hedge funds. Here are all, or at least some, of your questions answered...
What’s this mess all about?
To get to the root of Co-op Bank’s recent troubles, you need to look back to 2009 when the lender inherited big losses after taking over Britannia Building Society.
The extent of Co-op Bank’s problems became apparent in 2013 when it announced a £1.5bn black hole in its reserves.
A group of US hedge funds took control of the bank under a rescue deal which saw Co-op Group surrender a 70 per cent stake. This shareholding fell to around 20 per cent in 2014 when the bank sought a further £400m. In December that year, Co-op Bank failed a Bank of England stress test.
In 2015, the Bank of England’s Prudential Regulation Authority (PRA) gave the bank some breathing space, saying it would not need to issue more debt to cover its capital requirements that year.
Co-op Bank was then forced to put itself up for sale in February this year when it emerged that the lender could not meet future PRA stress requirements. In March, the bank said it was seeking an additional £700-750m of capital.
But no buyer was found?
No. A number of banks were linked with the sale process, but each eventually ruled themselves out. Virgin Money formally walked away from the process in May, while a late Swiss-Qatari deal was never given much of a chance.
So what deal has been struck?
A group of US hedge funds, existing investors, has agreed a £700m rescue deal with the bank. They will effectively write off £443m that they are owed through a debt-for-equity swap, resulting in a 17 per cent stake. They are also helping the bank raise £250m with a shares issue through a new holding company that will own a 68 per cent stake in the lender.
Who are the hedge funds behind the deal and why are they doing it?
Blue Mountain Capital Management, Cyrus Capital Partners, GoldenTree Asset Management, Silver Point and Anchorage Capital Group.
Goodbody banks analyst John Cronin described this deal as “the least worst option” for the investors, representing a better outcome than a disposal. He added: “The hedge funds are now motivated to agree a business plan that will be conducive to a profitable future for Co-op Bank.
“However, [they] may contemplate some disposals or carve-outs – potentially of non-performing and encumbered assets together with associated relevant funding – though that would mean a cleaner mainstream bank.”
What about Co-op Group?
The group’s shareholding in its namesake bank is shrinking further, from 20 per cent down to around one per cent. Announcing the deal, Co-op Bank said the “promotion of bank services to members of the group will naturally fall away and come to a formal end in 2020”.
In addition, under the deal, the bank and group agreed to a separation of their pension schemes. The bank said this “sectionalisation will represent a further important milestone towards the completion of the separation of Bank from Group that began in 2013”.
What does the Bank of England think about this deal?
The PRA confirmed it had “accepted the Co-operative Bank’s plan to build greater financial resilience”. It added: “Supervisors will remain closely engaged with the bank while the actions announced today are taken forward. Implementation is subject to certain regulatory approvals.”
What does it mean for Co-op Bank employees?
Rob MacGregor, national officer at Unite, which represents Co-op Bank staff, said the union was “cautiously welcoming this announcement as it ends a long period of uncertainty that has been difficult for the workforce”.
He added: “Unite is pleased that the future of the Bank appears protected as it continues to stand alone rather than being broken up and sold off in pieces... Unite will be meeting with the chief executive this week to seek assurances on what the deal will mean for our members in the long term, including job security assurances and pension protections.”
What does it mean for Co-op Bank customers?
Co-op Bank said the deal is a “good outcome” for its four million customers and means that the lender can “continue as a viable, stand-alone entity with values and ethics and strong customer service continuing at the heart of the business”.
Does this mark an end of Co-op Bank’s recent troubles?
Banks analyst Cronin said: “Assuming that the proposal is effected, the recapitalisation of Co-op Bank will certainly put the institution on a much stronger footing, thereby significantly improving its opportunities for profitable growth.”
What ever happened to the ‘Crystal Methodist’?
Former Co-op Bank chairman Paul Flowers, a Methodist minister, stepped down in 2013 after the £1.5bn black hole emerged. Things got worse a couple of months later when he became embroiled in a class A drugs scandal. Flowers, later nicknamed the Crystal Methodist, has gone quiet in recent years. However, it was reported in January this year that he was removed as a Methodist church minister following his conviction for drug possession in 2014.