Pressure is mounting on struggling lender Co-operative Bank after a group of bondholders demanded it tear up a rescue plan to plug a £1.5 billion black hole in its balance sheet.
The bank, which last month admitted it would take several years to return to profit after slumping to a loss of £709.4 million in the first half of the year, is putting the finishing touches to plans that will see bondholders take heavy losses as it seeks to address the shortfall.
This move will generate about £1bn in capital, while the Co-op Bank, run by former HSBC North America chief Niall Booker, is seeking to raise a further £500m by selling parts of its business.
Bondholders, including thousands of small investors, would be given shares in the newly-listed bank in return for losing some of their investment, but the Co-op plans to retain control of the lender.
However, a powerful group of bondholders, advised by investment bank Moelis & Co, has tabled an alternative plan for the mutual to convert more of its debt into shares.
A spokesman said: “After giving effect to that conversion, any capital shortfall would be small and could be readily raised through cash investment, whether by existing holders of bank securities, the bank’s parent, or outside third parties.”
The investors, which together own about 43 per cent of the bank’s lower tier-two bonds, is attempting to squeeze better terms out of the lender and potentially give bondholders majority ownership of the bank.
The group, believed to be fronted by US hedge funds Aurelius Capital Management and Silver Point Capital, said its plan would allow the Co-op to meet regulators’ capital demands and called for its proposals to be given “serious consideration”. It also urged the bank and its advisers to open its books to investors, and reveal the same information that has been given to the wider Co-op group, which has interests spanning funeral services and supermarkets.
The Co-op said: “We are uncertain of the structure, deliverability and conditionality of what is proposed by Moelis, but we are willing to engage with them to investigate further.”
The bank once harboured ambitions of challenging the established high street lenders, but a £750m deal to buy 632 branches from Lloyds Banking Group collapsed in April. Former Treasury official Sir Christopher Kelly has been drafted in to carry out a “forensic” inquiry into the Lloyds deal and the disastrous takeover of Britannia Building Society in 2009, which has saddled the bank with soured corporate loans.
Co-operative Group, headed by Scots-born chief executive Euan Sutherland, left, has said there is “no Plan B” to its proposal, and warned that the bank could be nationalised if bondholders do not approve its rescue plan by the end of next month.
Royal London has already bought Co-op’s fund management and life insurance arms for £219m.