* Bondholders to take majority stake in Co-op Bank
* Original plan saw Co-op retaining control of bank
* New proposals to protect retail investors - sources
* Co-op says committed to preserving ethical focus
* Some customers threaten to move to other lenders
By Matt Scuffham
LONDON, Oct 21 Britain's mutually-owned
Co-operative Group will hand control of its banking
arm to creditors including U.S. hedge funds in order to seal a
1.5 billion pound ($2.4 billion) rescue of the country's
The Co-op Group, which currently owns the Co-operative Bank
outright, has bowed to the demands of a group of
bondholders, including U.S. hedge funds Aurelius Capital and
Silver Point Capital, and agreed to a restructuring which will
leave it with a 30 percent stake in the bank.
The move risks alienating the bank's 4.7 million customers,
many of whom were drawn to it because of its perceived ethical
focus, and some using social networking site Twitter threatened
to leave if the change of ownership went ahead.
"We're planning to move away from Co-op Bank. Anyone know
any ethical bank business current accounts?" said one.
Another suggested an action group or petition be set up to
"let hedge funders know if they take control of Co-op Bank all
signed up will go to other banks".
Co-op Group chief executive Euan Sutherland said on Monday
he had reached an agreement in principle to save the bank.
The group, which also runs supermarkets, a travel agency and
funeral services, added it remained committed to preserving the
bank's ethical focus.
One source with knowledge of the discussions said the bank
would continue to be called "Co-op" after bondholders take
control and would retain its existing management.
The Co-op Bank hit trouble after racking up big losses on
commercial property. Many of the bad loans were acquired through
its takeover of the Britannia Building Society in 2009.
In June, the Co-op Group unveiled a plan to raise money from
asset sales, bank loans and slicing the value of bonds in a bid
to plug a 1.5 billion pound capital shortfall at the bank. That
would have left the group with a controlling stake.
But rebel bondholders last month submitted an alternative
proposal that would give them majority ownership of the bank.
Both plans use a so-called "bail-in" model where bondholders
will swap their debt for new bonds and equity in the bank, which
will be listed on the London Stock Exchange.
The proposals meet new European directives which force
bondholders and depositors, rather than taxpayers, to bear the
cost of failed banks. Policymakers are keen to prevent a repeat
of the 2008 financial crisis when billions of dollars of
taxpayers' money was used to rescue banks.
"This is the first bank to be rescued and to survive as a
standalone entity without taxpayer money," Sutherland said.
The new plan for the Co-op Bank represents a climb-down by
Sutherland, who had previously insisted there was "no plan B"
and that the only alternative to his rescue plan for the bank
was a formal resolution process which would have seen its assets
seized by the Bank of England.
The bondholder group, which is advised by investment bank
Moelis, represents institutions owning about 43 percent of the
bank's lower Tier 2 bonds. It built up large enough positions on
tranches of Co-op Bank's debt to block the deal proposed by the
Co-op Group, Britain's biggest customer-owned business.
Sources with knowledge of the matter said the new proposals
would protect the Co-op Bank's 15,000 retail bondholders, many
of whom are pensioners who had relied on coupons from their
investments. They are likely to receive a new income bearing
bond rather than having their debt converted into shares.
Mark Taber, who has campaigned on behalf of retail
investors, welcomed that development, but said he needed to see
more details of the new plan.
"If they are being offered a bond, the terms will be
important. They will need to consider how it's going to be
structured and approached and the mechanics of it and make sure
people aren't treated unfairly within it or left out," he said.
The Co-op Group said constructive engagement with
bondholders was continuing and it was confident a proposal to
recapitalise the bank could be agreed and put to all of them.
Co-op Bank's bonds rallied on Monday before being suspended
from trading on the London Stock Exchange at the bank's request.
The bank said it would request the suspension be lifted when the
full details of the plan are announced.