The Co-operative Group on Monday sought to reassure customers of its troubled banking arm that its ethical approach could be maintained as it confirmed that activist hedge funds were taking a crucial role in the £1.5bn rescue of the bank.
The loss-making bank indicated that a significant number of jobs were on the line as it announced a sweeping restructuring that will see the closure of around 50 branches from its 324 estate. It plans to move more customers to online banking and its network of corporate banking sectors is also to be rationalised. Even so, it warned that it would not make profits until 2015 at the earliest, and possibly not “for some years thereafter”.
The restructuring is an attempt to stabilise the bank, which needs £1.5bn of extra capital to absorb losses on loans that have turned sour. Until now, it has been 100% owned by the mutual Co-operative Group.
The group of supermarkets, funeral homes and pharmacies is being forced to hand 70% of the bank to bondholders led by the US hedge funds Silver Point and Aurelius, who have forced dramatic changes to the original plan first announced in June.
Richard Pym, the new chairman of Co-op Bank, said that if the bondholders did not vote for the new scheme the only alternative was “resolution” – in other words, being taken under the control of the Bank of England, or even possibly nationalised.
The bank will only be able to use the Co-operative name if it keeps its ethical stance, and customers will be given their say on this next year. They were last asked for their opinions on which businesses to lend to and which ones to turn away in 2009 and, since the bank first began its ethical approach in 1992, it has turned away £1.2bn of business. An independent director will chair an ethics and values committee. The bank said “customer power” would keep it ethical.
The group of hedge funds, advised by Caroline Silver of Moelis and known as LT2, stressed that it was determined to maintain the ethical stance for which the Co-op Bank is best known.
“We are proud that the recapitalisation 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. With the benefit of financial strength and the strong leadership brought into the bank this spring, we look forward to the resurgence of this unique institution,” she said.
The Co-op Group will now put £462m into the revamped bank rather than the £1bn announced in June, while the bond holders will take a 70% stake in the bank rather than the 25% originally expected. However, the hedge funds in the LT2 are also putting in an extra £125m of capital in addition to their bonds.
The LT2 group – so-called because they owned lower tier 2 debt – also revealed the identities of their backers as Beach Point Capital Management, Caspian Capital, Canyon Capital Advisors and Monarch Alternative Capital.
Niall Booker, appointed as chief executive of the bank in May, said he now wanted to focus on implementing a business plan that was likely to take five years to implement. He also stressed the commitment to ethics.
“We will strive to make things simpler for our customers, removing unnecessary processes and reducing costs. We will also put greater rigour into our risk management and controls, ensuring our customers are dealt with respectfully, fairly and transparently,” Booker said. The “legacy issues” of the past – largely bad loans from the Britannia Building Society deal in 2009 – were have an “impact for some time”.
Jobs are under threat with the branch closure programme. Some 15% of the 324 branches are to be shut, in sharp contrast to the ambitions of the previous management, which had planned to take the network to almost 1,000 branches via the aborted takeover of 631 branches from Lloyds Banking Group.
Euan Sutherland, who joined from B&Q in May to run the entire Co-op Group, said the bank had lost its way over the previous five years when it had expanded rapidly, merging with the Britannia and then attempting the audacious – and ill-fated – takeover of the so-called Verde branches from Lloyds.
It was the downgrade of the bank’s debt to junk by Moody’s in May that started to expose some of the problems it faced and led to concerns that the Co-op could pull out of banking altogether.
However, Sutherland said he was optimistic for the future of the bank.
Some 30,000 private investors who bought bonds providing a 13% coupon will also need to vote on the restructuring. They are to be offered a bond issued by the group which pays a lower rate of interest and get their capital back in 12 years time or can receive the same income for the next 12 years but forgo their capital at the end of period.
Mark Taber, the activist who has campaigned on behalf of private investors, said: “It is now up to all holders to decide whether to accept but we believe it is a much better solution.”
Police released CCTV images of Mr Mohamed arriving at the mosque…
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