Co-op denies rescue plan is demutualisation by back door

BRITAIN’s largest mutually-owned business denied that the £1.5bn rescue plan for its struggling bank is demutualisation by the back door and insisted the strength of the Co-op brand will prevail in spite of weeks of negative publicity surrounding the institution.
A £1 billion rescue plan for the Co-operative's troubled banking arm has been unveiledA £1 billion rescue plan for the Co-operative's troubled banking arm has been unveiled
A £1 billion rescue plan for the Co-operative's troubled banking arm has been unveiled

Bondholders, including many small retail investors, will be asked to swap IOU notes worth £1.3bn for a significant minority shareholding in the recapitalised bank. This will raise around £500m towards filling the £1.5bn black hole in the bank’s capital reserves.

The group plans to issue a new bond to help finance the debt-for-equity swap and hopes to complete the fundraising through the sale of its insurance businesses.

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The so-called ‘bail-in’ avoids the use of taxpayer funds and had to meet the approval of the new City watchdog, the Prudential Regulation Authority. A Bank of England spokesman warned: “We will hold the Co-operative to the delivery of its plans.”

Euan Sutherland, the new group chief executive, claimed that the announcement is “good news” for the Co-op group, the bank, its customers and members and described the complex restructuring proposal as “the fairest and most equitable plan for all involved”.

Small retail investors make up around five per cent of the bondholders – 7,000 in number – with the majority holding less than £1,000. Institutions own the rest, although these also include nominee accounts of stockbrokers.

The new shares will be listed on the London Stock Exchange later this year and will give investors the chance to benefit from any improvement in the lender’s fortunes, said the group.

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Asked if the complex restructuring proposal was equivalent to demutualisation, Mr Sutherland responded: “The bank has always been a plc and it always has had the ownership structure of our mutual organisation around that.

“That remains. We still have the majority stake in our bank. That provides us with the opportunity to lead our bank in an ethical, community-based, responsible way and that is a core part of our business plan going forward.”

He added that the Co-op brand is “incredibly strong” and has been around for 150 years. “It will prevail over the next 150 years,” he said.

A spokeswoman for the Building Societies Association welcomed the actions. “The mutual’s approach to business is not simply a matter of ownership structure, but of culture, leadership and good business practice. A mutual with a minority listing is far from unheard of and already operates as a successful model in Europe,” she added.

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The future of the bank, which has 4.7m customers, has been in question since Moody’s cut the lender’s credit rating to junk status and warned it might need taxpayer support – something the bank denied.

Its capital position had come under increased scrutiny since it pulled out of a deal to buy hundreds of bank branches from Lloyds Banking Group in April.

The group, which also runs supermarkets, funeral services and pharmacies, said the plans will generate £1bn of new capital this year and £500m in 2014.

Last month, it appointed Niall Booker, a veteran HSBC director, as chief executive to lead the turnaround at the bank. He said: “We have a strong core retail business in the bank.

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“While we recognise that the short-term outlook is challenging, the measures we are announcing today mean we now have a credible plan for addressing the capital shortfall we face and can turn our attention to managing our non-core assets down and restructuring our core bank.”

The group replaced chairman Paul Flowers, a methodist minister from Bradford, with Richard Pym, who steered Bradford & Bingley through its nationalisation and restructuring.

Mr Pym said: “The completion of the measures announced today will provide the foundations to support the long-term success of the bank in offering a real alternative to customers.”

Lloyds’ executives face grilling

THE Treasury Select Committee is set to quiz senior figures from Lloyds Banking Group today over Project Verde, the scheme to offload 632 branches as a condition of receiving state aid.

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Chief executive Antonio Horta-Osorio and chairman Sir Win Bischoff will be quizzed by MPs about the project and are likely to face questions about alleged political interference from the Treasury in the decision to choose the Co-operative Bank as preferred bidder.

Speaking last July, Mr Horta-Osorio said the Treasury was “very supportive” of the deal.

David Davis MP has called on the Government to explain the role it played in the bidding process and why Lloyds rejected the well-funded bid from NBNK, an Aim-listed acquisition vehicle, in favour of “an inferior bid from an institution that was clearly unable to fund the deal”.

Lord Levene, the City grandee who chaired the NBNK bid, wrote to the Chancellor with claims that he was told that political pressure influenced the decision. The taxpayer has a 39 per cent stake in the bank.

The coalition agreement of 2010 explicitly states that the Government will seek to foster