Co-op bondholders may be hit as shortfalls grow

 
Tim Wallace
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JUNIOR bondholders in the Co-operative Bank could take a hit if the bank struggles to fill its capital hole, analysts at Barclays warned yesterday, heightening the pressure on the mutual to take action.

The group is selling its life and general insurance arms which should raise hundreds of millions of pounds to boost the bank, but it may not be enough to plug the gap.

The exact size of the hole is not yet known. Analysts at Barclays expect it to be between £800m and £1.8bn, in a stressed case.

To fill the hole the Co-op is selling its life and asset management arm for £219m, hopes to raise £500m from its general insurance arm and then fill the rest of the gap by running down its bad loan portfolios.

But analysts fear the insurance sale will raise just £240m, leaving a capital shortfall of between £350m and £1.4bn.

As the Co-op cannot issue equity – it is owned by members, not shareholders – its options are constrained.

Initially further units could be sold, capital could be shuffled around from its parents and more deleveraging could take place. But analysts think it may eventually need to bail in junior bondholders.

“Concern regarding potential bondholder burden sharing in Europe is elevated. In the case of Co-Operative Bank, there is £1.3bn of subordinated securities that could be considered as part of a capital raising solution,” said Barclays’ Jonathan Glionna.

“While the range of potential outcomes is broad, we believe investors should remain cautious on the subordinated securities.”

However the bank itself has been keen to stress it has one of the strongest liquidity positions in the industry and is many steps away from taking any such action.

Co-op’s finances were thrown under the spotlight last week by Moody’s decision to downgrade the bank’s debt to junk.

Moody’s said debt writedowns and pressure from commercial real estate exposures increased the “moderate potential for systemic support likely to be forthcoming from the UK authorities”.