LONDON Britain's Co-operative Group CWSGR.UL has detailed a rescue plan for its banking arm, under which it will hand control of the unit to investors including U.S. hedge funds as part of a 1.5 billion pound ($2.4 billion) bail-in.
In a scheme first set out last month, the Co-op 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.
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 and the bank's management has subsequently been overhauled.
The plan set out on Monday involves Co-op Group contributing 462 million pounds to a recapitalization of the bank, while bondholders will swap their bonds for shares. They will also inject 125 million pounds of new capital.
Co-op Group will remain the bank's biggest single shareholder. No other single shareholders will have a stake of more than 9.9 percent.
Co-op has also come up with fresh proposals to safeguard the financial interests of its 10,000 retail bondholders, many of whom are pensioners who had relied on coupons from their investments. The plan guarantees investors annual payments for the next 12 years.
"This deal has been extremely hard fought and is now a much better solution for retail holders and pensioners," said Mark Taber, who had campaigned on behalf of retail investors.
Co-op Bank's new Chief Executive Niall Booker told reporters it could take four to five years to turn around the bank's fortunes.
VALUES AND ETHICS
In the meantime the rescue still risks alienating the bank's 4.7 million customers, many of whom were drawn to the lender because of its perceived ethical focus. Concerns were inflamed by Co-op's revelation on Monday that it planned to close down around 15 percent of the bank's 324 branches, resulting in significant job losses.
"With hedge funds at the wheel, the bank will become more ruthlessly commercial. Cutting 1,000 jobs at the same time as you launch an ethics policy is quite a contradiction," said Andre Spicer, a professor at Cass Business School.
Co-op sought to reassure customers and staff with a commitment that the group's values and ethics would be legally embedded in the bank's constitution.
"What's really important to our customers and our members is that the bank continues and that the values and ethics of the bank are right at the heart of that," Co-op Group Chief Executive Euan Sutherland told BBC radio.
"For the first time ever we've written that into the constitution of the bank," Sutherland said. The commitment will be supported by an independent value and ethics committee.
Bondholders advised by Moelis & Co had built up large enough positions on tranches of Co-op Bank's debt to block a proposal which would have involved Co-op retaining a majority stake.
Bondholders said the deal was the "first consensual creditor bank bail-in in the UK without taxpayer support.
"We are proud that the recapitalization will enable the Co-op Bank to continue its unique mission as a UK bank committed to the values and ethics of the Co-operative movement," they said in a statement.
The plan was also welcomed by Britain's financial supervisor.
($1 = 0.6281 British pounds)
(Additional reporting by Sarah Young and Huw Jones; Editing by Steve Slater and David Holmes)