UPDATE 1-Co-op Bank bondholders submit alternative rescue plan
* Bondholder group says there is a "plan B" for Co-op Bank
* Move seen as attempt to get better terms from Co-op Group
* Bondholder group includes pair of U.S. hedge funds
LONDON, Sept 16 (Reuters) - A group of bondholders in Britain's Co-operative Bank has put forward an alternative plan for filling the lender's 1.5 billion-pound ($2.4 billion) capital hole, seeking a bigger equity stake than proposed by the Co-op in its rescue plan.
Co-op Bank has 4.7 million customers but hit trouble after racking up big losses on commercial property. In June the Co-op Group, parent of Co-op Bank, unveiled a plan to raise the money from asset sales, bank loans and slicing the value of bonds: the first plan to attempt to force bondholders to bail out a bank rather than taxpayers.
On Monday a group of bondholders, advised by investment bank Moelis & Co., said it had submitted a different recapitalisation plan to Co-op Bank's board of directors on behalf of institutions owning about 43 percent of the bank's lower Tier 2 bonds.
Its proposal, a debt-for-equity swap, attempts to squeeze better terms out of Co-op Group and potentially give bondholders majority ownership of the bank.
Under the Co-op's plan, the Co-op Bank would be publicly listed with Co-op Group as the majority shareholder and bondholders owning a minority.
"Bondholders are basically crystallising what they said before, which is that they want a bigger equity stake in Co-op," said a London-based portfolio manager.
Co-op Group declined to give an immediate comment.
The group of bondholders includes two U.S. hedge funds, Aurelius Capital and Silver Point Capital. They are reported to have built up large enough positions on tranches of Co-op Bank's debt to block the deal proposed by Co-op Group.
Co-op Group has said there is "no Plan B" to its proposal, and warned if bondholders do not agree the plan the bank could be nationalised and leave investors with nothing. Bondholders need to approve the plan by the end of October.
The Moelis & Co group of bondholders said it could plug the capital gap by the end of this year, mainly by converting subordinated bonds and preferred stock into Bank common stock. Co-op Bank has about 1.3 billion pounds of bonds outstanding.
The group - which was formed in June and has more than 60 billion pounds of assets under management - called on Co-op Bank's board and advisers to "engage in immediate and substantive discussions" with it.
Two people with direct knowledge of the matter said Co-op Group had expressed a willingness to meet, but the bondholder group only wanted to negotiate with Co-op Bank executives.
The bondholder group said after its proposed debt-for-equity swap, any capital shortfall would be small and could be raised from a cash investment by Co-op Group, debt investors or outside third parties, and it would be willing to provide the cash.
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