The Co-Operative Bank has announced details of their revised plans for “recapitalisation” of the bank, which is a euphemism for rescuing it from potential bankruptcy. In effect the previous capital of the bank has been wiped out by dodgy lending, by inept acquisitions such as that of the Britannia B.S. and write-offs of IT expenditure.
The existing institutional debt holders will have their debt converted to equity, plus will subscribe additional capital. The Co-Operative Group will put in an additional £462m of equity so that they retain a 30% stake in the Bank. The Articles of the Bank are being rewritten to emphasise the ethical focus of the organisation because otherwise the Bank will be under the control of those nasty hedge-funds and the usual stock market speculators (at least that’s the way some of the media reported it).
The good news for private investors who hold the PIBS and other subordinated bonds is that they can take an “exchange offer” that enables them to either continue to receive the same level of interest as in the past for the next twelve years but there is no capital value at the end, or a lower level of income with a slightly reduced capital value repaid at the end. This is quite an innovatory solution and will help those who bought these bonds for retirement income enormously. Which option they choose may depend on their view of their life expectancy. Mark Taber who has been representing the interests of private holders is to be congratulated on getting this agreed.
All of these proposals will require the approval of the debt holders by a vote so it is not absolutely a done deal as yet, but the Co-Op have spelled out that if support is not forthcoming then the bank might not be considered a going concern and the authorities are likely to put it into a “Resolution” process.
This is certainly a more positive outcome than was first proposed by the Co-Op, and it is good that pressure has been brought to bear to get the deal revised. It still leaves the problem that the FCA has done little to protect the interests of retail investors in these bonds, the issue of the failure to disclose the financial problems faced by the Co-Op at an early date and whether the accounts truly reflected the position of the bank. It remains the case that investing in the “fixed” interest securities of banks is not the safe proposition that it was once thought to be, but an extremely risky one. It will remain so until there is proper reform of the accounting policies, the regulation of banks and the attitude of the FCA to retail investors in such securities.
It will be very interesting to see how the Articles of the company are rewritten to encourage the directors to act ethically in future, as opposed to acting like a normal commercial business solely subject to company law.
In summary though it is an innovatory solution to the problems faced, in more than one way.
Roger Lawson
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