Shares in UK’s Co-operative Bank to list on stock market in rescue deal

Shares in the Co-operative Bank are to be listed on the stock market for the first time, in an historic rescue deal to raise £1.5 billion, which will force the bank’s bondholders to take losses on the investment.

The agreement with the City regulator, the Prudential Regulation Authority (PRA), follows weeks of speculation about the bank after it was downgraded six notches to junk by the Moody’s rating agency.

While the bank was previously a public limited company owned by the mutual Co-operative Group, which includes grocers, funeral homes and pharmacy chains, it will end up with shares listed on the stock exchange under a complex “bail in” of bondholders in October.

The “bail in” is a new method for helping banks raise capital and allows the Co-op to avoid having to raid other parts of its business or turn to the taxpayer to plug the shortfall which has already forced it to stop lending to big corporations.

It is a blow to the mutual sector Co-op Group is the largest in the UK which the government had been targeting for growth.

The Co-op bank, which has 4.7 million customers, will raise £1 billion this year and another £500 million next year through the bail in and selling off its insurance operations.

The bank said that 5 per cent of the bonds affected which pay high rates of interest were held by retail investors whose average investment was 1,000 each. The precise detail of their losses may not become clear until full details of the “exchange offer” are published before October.

The problems were uncovered during long-running and now abandoned attempts to take over 632 Lloyds Banking Group branches and largely stem from losses on corporate lending by Britannia building society, which the Co-op’s financial services arm merged with in 2009. At the time the deal, which was reached in the midle of the banking crisis, was heralded as a breakthrough for the mutual sector.

The management of the bank and the wider Co-operative Group has been overhauled and Euan Sutherland, the former boss of BQ who is now overseeing the whole group, said subordinate bondholders were being asked to prop up the bank.

“This solution, under which they will own a significant minority stake in the bank, will then allow them to share in the upside of the transformation of the bank,” Sutherland said.

“The bank itself has outlined a series of self-help measures that underpin a more targeted strategy for a responsible community bank focused on its retail and SME [small to medium enterprise] customers,” Sutherland said.

The Co-op’s failed attempt to buy the Lloyds branches will be scrutinised by the Treasury select committee, which will take evidence from the Lloyds chief executive, Antnio Horta-Osrio, and chairman, Sir Win Bischoff, on Tuesday. The aborted deal is continuing to create controversy, with the chancellor, George Osborne, being accused of interfering by encouraging the Co-op to buy the branches, which must be sold under the terms of the Lloyds £20 billion bailout.

The Conservative MP David Davis wrote to the Times saying the Treasury should explain its role. Mark Hoban, City minister at the time, held 30 meetings to smooth the deal.

The PRA said the extra capital was needed to be able to absorb potential losses in coming years and that the result of an industry-wide capital exercise would be published on Thursday. “We will hold the Co-operative to the delivery of its plans,” the PRA said.

The Co-op bank has hired a new chief executive, Niall Booker, a former long-serving HSBC banker. Booker said: “Whilst we recognise that the short-term outlook is challenging, the measures we are announcing today mean we now have a credible plan for addressing the capital shortfall we face and can turn our attention to managing our non-core assets down and restructuring our core bank.”

Later this week Osborne is expected to unveil plans to reform banks and sell off stakes in Lloyds Banking Group and Royal Bank of Scotland.

— Guardian News and Media 2013