Co-op Bank plans debt-for-equity swap in search for capital
We informed you in February 2017 that the Co-operative Bank was up for sale in efforts to “build capital”. While potential acquirers - such as Virgin Money, TSB and Santander UK - were rumoured to have initially expressed an interest, the bank has of yet been unable to find a buyer for the whole company, although it is understood that there is at least one prospective buyer.
Last week, it was revealed that the Co-op board is aiming to agree an imminent debt-for-equity swap so as to complete the process before the bank’s £400m of senior bonds reach maturity in September. This process, known as a liability management exercise, will aid the bank by reducing its financial burden but still leaves circa £300m that needs to be raised in new equity.
Sky News reported this weekend that invested hedge funds into the bank – including GoldenTree Asset Management, Blue Mountain Capital Management, Cyrus Capital Partners and Silver Point - were establishing terms to inject these new funds into the bank within a fortnight, albeit no formal comment has been given.
Regulators have given no official deadline for the capital injection required and the bank has stated that it continues to meet “key regulatory capital and liquidity requirements”. However, the bank continues to suffer from large pension liabilities as well as a string of legacy problems since its 2013 bailout of £1.5bn, both of which pose significant hurdles for obtaining a buyer for the whole of the business.
Should no new capital be injected or proven, the Bank of England could order a liquidation of the bank, although they would likely be reluctant to do so.
Commentary
The Co-op Bank’s financial difficulties are important for those clients that have savings with the bank above the Financial Services Compensation Scheme limit (currently set at £85,000, except for joint private clients which is set at twice the limit at £170,000). Any collapse of the bank and its banking licence (which includes the Co-op Bank, Britannia BS and Smile) would leave savings above these levels exposed.
Many of the bank’s clients include charities, social enterprises and other similar firms due to its fairly unique ethical policy, enacted since 1992. This ethical policy restricts the bank on whom it can lend and has long been aligned to the needs of the charitable space. Any trustee of such organisations with cash held at the bank is recommended to pay close attention.
Should anyone wish to talk about how best to position your savings should the Co-op Bank fail to reach a solution, please do give us a call on 0191 481 3777 and we’ll be happy to assist.