It’s been an astonishing couple of months for the Co-op. At the beginning of April, the bank was problem-free and about to buy 631 ex-Lloyds bank branches.
Then, an investigation by the Prudential Regulation Authority, the new City regulator, uncovered a gaping £1bn hole in its balance sheet – which (as usual) stems from bad property loans, in this case those held by the Britannia Building Society, which it took over in 2009.
As a result, in May Moody’s took the decision to downgrade its credit rating to junk – a drop of six notches.
The bank’s solution to its problems works like this: junior bondholders (ie the bondholders the bank would pay off last if it got into trouble), who hold about 5% of the Co-op’s subordinated debt, will be asked to swap their bonds for shares in the bank and bonds in the Co-operative group. The shares will then be floated on the stock market.
The bank reckons by restructuring like this, it can raise about £1bn this year and £500m the next, pushing its core tier one capital ratio – essentially, the amount of capital it holds compared with its loans – above 9% by the end of the year.
In some ways, it’s the perfect solution: the bank is rescued without the need for taxpayers to get involved, and bondholders are given ‘a significant minority stake’ in the bank. Plus, it gets to keep hold of its much-prized pharmacy chain, which last year brought in £28.2m in operating profits.
But not everyone’s impressed. The majority of junior bondholders are small investors, who are used to getting as much as 13% a year back from their investments. But the deal will mean that, in the short term, almost a third of their cash is wiped out – which won’t go down well with, for example, pension fund investors.
The bank has also begun selling off its assets, starting with the £219m sale of its life insurance and asset management business to Royal London this year. It will also flog its insurance business for £240m.
Sutherland et al are unlikely to have a happy few months ahead of them – but if they can pull it off, bail-ins are going to be hipper than Kate Moss’s sunglasses. All the coolest banks will want one.