Moody's downgrades Co-op Bank to reflect high likelihood of default

Ratings agency Moody's has downgraded the Co-op Bank's senior unsecured debt and deposit ratings from Ba3 to Caa1, with a developing outlook (release).

Subordinated debt and junior subordinated debt ratings have been downgraded to Ca and Ca (hyb) from B2 and B3 (hyb) respectively.

Today's rating action follows the bank's announcement of a regulatory capital shortfall requiring a recapitalisation via burden-sharing with junior creditors and asset disposals (primarily of its parent's insurance businesses). The announcement confirms Moody's view that the Co-operative Bank may only return to being a fully solvent, operational entity through a substantial recapitalization, which as proposed would involve a bail-in of junior creditors, together with a very significant restructuring of the bank's operations.

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WHAT COULD MOVE THE RATINGS DOWN/UP

Negative pressure on Co-operative Bank's deposit and senior unsecured rating would stem from either the bank's failure to execute the proposed recapitalisation and the cost saving and restructuring plans or a significant deterioration of its liquidity, which could lead to higher losses for these securities.

Upward pressure on the ratings could develop upon successful conclusion of the liability management exercise as well as following successful completion of the full recapitalisation plan and significant progress being made in the bank's restructuring, deleveraging and cost-saving initiatives.