That’s the fate that’s befallen the Co-operative Bank, the struggling lender which over the summer admitted it had a £1.5bn hole in its balance sheet.
To plug the gap, the bank suggested a ‘bail-in’, where junior bondholders would swap their debt for equity (thereby taking most of the hit), reducing its debt repayments and allowing it to shore up its capital that way. Admittedly, under the plans it would have floated on the stock market – but the Co-operative Group would still have been the majority shareholder.
But a group of US hedge funds, led by Aurelius Capital Management and Silver Point Capital, have put a stop to that. They objected to the original plans, saying they weren’t getting enough equity. Instead, they want bondholders to get more shares in return for writing off the bank’s debt – meaning the Co-op will become a minority shareholder. Retail investors, who have complained they rely on the income from their high-yielding bonds and therefore would rather not swap it for equity, will be issued new bonds rather than forced to swap their current ones for shares.
By the sounds of it, the Co-op is grudgingly accepting of the deal: it may lose control, but that also means it has to stump up far less than the £500m it was originally expecting to have to top up the bank’s finances with.
That said, there are worries that the fact that the bank is about to be majority owned by a group of ‘evil’ hedge funds means its customers – many of whom have chosen it on the basis of its ethical credentials – will leave in their droves. The new owners have said they want to retain its ethical positioning - but for many retail punters the fact that it is no longer a co-operative but is owned in the same way as any number of other banks might put them off. Who says 'we're going to run an unethical bank'?
Still – the company was always going to be pretty jammy if it got away with its original plans, and this deal seems to keep most investors (except, arguably, the Co-op itself) happy. In that respect, it’s the best of a bad situation.