The Co-operative Bank is in “advanced discussions” with existing investors about injecting more capital into the lender despite concerns over its pension liabilities, after warning earlier this year that it would fall below the regulator’s requirements.
The lossmaking bank, which is 20 per cent owned by the Co-operative Group, said in a stock exchange announcement on Monday morning that talks with a group of investors have progressed, and involve a capital raise and debt-for-equity swap.
The deal would mean some investors exchange their debt for equity in the bank at a loss, in order to raise about £450m, according to bankers briefed on the plan. The bank must also raise about £250m-£300m in new equity.
The investors that are most likely of the existing tier-two bondholders to pump in more capital include Cyrus Capital Partners, GoldenTree Asset Management, Silver Point Capital and Blue Mountain.
The talks come after the lender revealed at the start of the year that it is set to fall below the Prudential Regulation Authority’s minimum capital requirements over the next few years.
One person briefed on the talks said that a deal was close but that pension fund issues were being negotiated between the Co-operative Group and the bondholders.
Another person close to the talks said that “there’s no enormous issue which is proving insurmountable” and that the discussions are “ahead of schedule”.
However, the bank had originally hoped to strike a deal by mid-June, in order to complete the debt-for-equity swap process before £400m of senior bonds mature in September.
The Co-op Bank said it was still pursuing an attempt to sell the entire lender at the same time as advancing talks with existing investors to raise capital. Last week it emerged that the bank had been approached about a possible takeover by a Qatari company, Al Faisal Holding, working with a Swiss investment group called Interritus.
But the bank’s pension fund liabilities are a significant hurdle for any prospective buyer and the investors negotiating a deal. The lender has £800m of liabilities from the Britannia Building Society scheme, which it acquired in 2009, plus a share of £8bn of liabilities from the Co-op Group’s scheme. The bank is attempting to separate its scheme from the group pension fund.
John Ralfe, an independent pensions consultant, recently told the FT that the “modest value” of the Co-op Bank’s operating business was “completely swamped by its huge pension liabilities”. He added: “No potential purchaser will be prepared to buy the bank as a whole.”
Failure to raise capital could result in a wind-down of the lender, in a test of the Bank of England’s resolution powers.
The Co-operative Bank declined to comment.