Co-op bail-in blazes trail for future rescues of troubled banks

Tim Wallace
Follow Tim

THE CO-OP Bank bail-in will set a crucial precedent for future bank problems, yesterday showing banks can tap bondholders and shareholders for funds when they need support instead of turning to the taxpayer.

The lender found a £1.5bn capital hole and will plug the gap with funds from the Co-Operative Group, the sale of its insurance arm and running down bad assets, and a haircut on junior bondholders.

Each of those sources are likely to provide around £500m each, with bondholders taking losses of around 30 per cent on their investments.

Those junior investors will then receive new bonds in the group plus shares in the bank, which will list on the stock market in October.

The move represents a key shift for the group, which had previously fully owned the bank, and for the banking sector – in the past the government would often have got involved with financial support.

The Bank of England’s prudential regulatory authority (PRA) has given the green light to the plan, which will take around 18 months.

“This shows the first high profile bail-in action and how it can work to ensure firms can move forward and improve core tier one capital,” said a source close to the PRA.

“It is a useful look at flesh on the bones of all of the talk around bail-in in recent years.”

However the deal remains far from finalised – the bank still needs to sell its insurance arm and persuade bondholders to take part in the bond and equity swap.

Meanwhile the bank’s new chief Niall Booker pledged to keep loyal to the bank’s mutual past, even if it is traded on the stock market like other lenders.

“This won’t affect the way the bank is run going forward. The group will still hold a majority stake and the board is committed to responsible, community banking, with reference to our ethical heritage, focused on retail and SME customers,” he said yesterday.

What is the Co-op Bank bail in and what does it mean for investors?
Q and A

Q What is wrong at the Co-Op Bank?

A The bank and watchdog found a £1.5bn capital hole. Some of this comes from commercial property lending before the crisis, but the trouble really began when the Co-op took over Britannia Building Society, with a large portfolio of toxic loans.

Q How is the bank going to recover from this trouble?

A The Co-op Group was the sole owner of the bank, but its stake is essentially wiped out by the losses. It will put in £500m to recapitalise the bank, taking majority ownership. But that is not enough to restore the finances – it will sell its insurance arm, run down £15bn of bad loans and bail in junior bondholders.

Q What does the bail in mean? Do bondholders have to accept the deal?

A The bondholders will be offered new bonds in the group, plus shares in the bank. In total that will come to around 70 per cent of the par value of the bonds exchanged. So an investor who put in £1000 will be left with securities worth £700. The deal will be voluntary.

Q Why would anyone take the deal when it means losing 30 per cent?

A Until the bank recovers, investors who received annual payouts will see those stop. The new bonds mature in a few years giving a more certain return. And the bank hopes investors will take shares on the basis they could rise in value.

Q What if bondholders decide not to go along with this plan?

A The bank needs £1bn of the total £1.3bn bonds to be traded in. If that is not reached it could try more generous terms, compel a swap; move up the hierarchy to involve more investors; the group could pay more; and the state could be asked to pay.